Internationally, There Are No Separate Institutions For Long-Term

In a candid interface with Abhijit Doshi of The Money Manager, Lalita Gupte, deputy managing director of ICICI, comments not just on these contentious issues but also gives an insight into the future plans of a financial institution that seems poised to change the market altogether.

Q. Barely a week after ICICI had announced that it would not reduce lending rates, it has slashed them in a major way. What were the considerations behind this surprising move?

A. Well, if you look at the market, interest rates have been volatile for quite some time. Short-term rates were softening while

long-term rates were still high. But the credit policy changed the situation drastically. Now, there is downward pressure on the long-term rates as well, which we had not expected. The yield curve that started shaping up

immediately after the credit

policy was announced, clearly indicated that the long-term

rates too would move southward. We consulted our treasury experts and customers, and the decision to reduce the lending rates was based on these

discussions.

Q. So where do we move from here? Will the lending rates be volatile? Will they be changed frequently?

A. From now on, lending rates will be more sensitive to the market. Any major event that affects liquidity political developments, capital flows, large international borrowings or any other major event will have some bearing on lending rates too. The medium-term prime rate will be reset accordingly. You must also remember that in the absence of a full-fledged benchmark rate, we are not able to undertake swap operations in the market. That leaves us with little choice but to reset the prime rate as and when market conditions change.

Q. The reduced lending rate is 13.5 per cent for the medium term, while your average cost of funds is around 11.85 per cent. Would this not put pressure on your spreads? Can you sustain lending operations at such rates?

A. While the average cost is 11.85 per cent, we price our lendings on the basis of marginal cost. And you must also add a margin to the 13.5 per cent figure. On an average, that is 3.5 per cent. So, there is no fear of our spreads coming under pressure. We are confident that we can sustain ourselves. Besides, we spend a lot of time and effort in ensuring that our asset-liability mismatch remains very low. We have expertise in doing this. So that too is not a problem.

Q. In the changing interest rate scenario, do you see lending rates getting linked to the bank rate?

A. That is the most logical thing to happen. As the bank rate emerges as the reference rate in the market, loans will be priced off the benchmark rate. For lenders, it should be an easy thing to do.

Q. The financial institutions are moving into working capital financing - a forte of commercial banks so far, while the banks are getting ready for long-term loans. Are we moving towards universal banking?

A. That is inevitable, as we globalise. Internationally, there is no demarcation between long-term and short- term financing at the market level. There are no separate institutions for them. India had, for historical reasons, a distinction between banks and financial institutions. The development financial institutions were created to undertake risk and lend to industries at lower costs. Now there is no need for such separation. Besides, financial institutions, too, need to be competitive. They must cover both ends of the spectrum - the short term and the long term. And as customers needs change, they must move between

products.

Q. Does that mean that you are thinking of merging ICICI Bank into the parent body?

A. That is not a crucial issue. The merger really does not matter. Right now decisions are taken independently, but the level of professionalism is at the same high level. It is a question of

synergy.

Q. With ICICI and maybe other financial institutions getting into short-term loans, what happens to SBI and other banks? Will they be able to withstand the competition?

A. You must not forget that India is still a developing country. It needs much more by way of resources and the pie is growing. There is place for many players. So, the point is not of competition but of syndicating efforts to raise more resources. The risk-bearing capacity of players must be enhanced so that long-term resources can be raised. We are still pygmies by international standards.

Q. Turning to your results for 1996-97, which have just been announced, you have not provided for unrealised losses on your capital. A provision could have brought down the earnings per share. The stock market has realised this and has reacted accordingly. How do you justify it?

A. According to the Reserve Bank of Indias policy, we have made a distinction between long-term and short- term assets for this purpose. Our long-term investment is in projects, which are at different stages. Market prices obviously do not reflect this situation. Because the projects are at the stages of development , there is only temporary diminution. And you must also note that all these figures have been closely examined by the auditors and certified by them.

Q. Talking about auditors, you have plans to get your performance audited on a quarterly basis and later on even on a monthly basis. What is the purpose of this plan?

A. Well, we certainly would like to set high standards for ourselves. Quarterly auditing by external auditors will also give us a lot of confidence, even as it will imply setting a high benchmark.

Q. In your accounts, you have introduced the concept of collateralised non-performing assets (NPAs). But how realistic is the concept? Would you be able to encash the collateral if required?

A. This is a practice followed internationally. We would like to introduce it here. Internationally, lending institutions have some part of their loans that are not covered by collateral. But in our case, collaterals have been land and buildings at historical cost. And our experience shows that it is not difficult to recover money through this route.

Q. In your recent bond issue, you dropped the green shoe option after the issue was oversubscribed. There is also the market talk that you may exercise the call option in your last years bond issue. In last years issue, the USP was the long-term deep discount bonds. So, what signals are you sending to retail investors whom you might have to tap again in future?

A. This is a market reality that everyone must accept. As for the last years bonds issue, we have not taken any decision. But the options were clearly stated to the investors. I do not see any problem about market signals.

Q. You have set up ICICI Credit Ltd. What activities will this company take up?

A. It is going to be a company that will undertake retailing of products such as leasing. We will shortly announce the details.

Q. Regarding the merger of SCICI with ICICI, a host of problems have emerged about placing of people. How do you intend to solve these issues?

A. Well, the merger has just happened. It is only a few days old. Allow us some time and we will resolve the problems. Believe me, the most important asset of this organisation is the quality of people. And we do not intend to lose quality people. So there is no need for concern on this account.

Q. And what about restructuring at the ICICI?

A. As far as the present is concerned, we have finished re-structuring.

Q. What sort of activities would we see at the ICICI in the near future?

A. A lot, in fact. We are working on a lot of innovative products for the financial market. Products structured around risks in terms of interest rates and exchange rates are on the cards. Credit derivatives are the need of the day and we are working on them. With the removal of CRR on interbank liabilities, the money market and forex market will move towards integration. That will throw up many swap opportunities. Debt securitisation is another area in which we are planning some products. Within the next one year, you will see many activities in structured financing. We will also get into takeout financing, where we take a part of loans and refinance them. It is a form of securitisation. We will also soon offer a range of

maturities - from one month onwards. This should help our clients in moving from one product to another.

I n our case, collaterals have been land and buildings at historical cost. Our experience shows that it is not difficult to recover money through this route.

We will soon offer a range of maturities - one month onwards. This should help our clients in moving from one product to another.