The curious case of rising bank loans

Why corporates are borrowing more in a slowing economy

October 5, 2013:  

The economy is slowing, but lending by banks, usually an indicator of economic activity, seems to be picking up. Data put out by the RBI show that total (non-food) bank credit expanded 17 per cent year-on-year in August, accelerating from 13-14 per cent in the preceding months this year.

Breaking down this data into individual segments throws up quite a few surprises. The commercial real estate sector, believed to be in doldrums, saw credit growth of 17.4 per cent in August while home loans surged 19 per cent. The services sector saw credit expansion of 18.4 per cent. Vehicle loans grew 23 per cent.

WHAT EXPLAINS THIS?

First, if the corporate sector is wary of new investments, why is it using up so much more credit? According to bankers, companies are borrowing more, not to fund new projects but to finance working capital requirements. After RBI’s short-term rate hikes in July, companies have taken to borrowing more from banks rather than the bond market. “Adverse money market conditions after the liquidity tightening measures have prompted companies to extend their line of credit with banks,” says Sunil Pant, Chief General Manager, SBI.

Within the services segment, non-banking finance companies (NBFCs) rely a lot on bank credit. Loans to NBFCs shot up 18 per cent in August from 5 per cent in the previous months. Oil marketing companies have also been knocking at the banks’ doors.

“Oil marketing companies have borrowed in rupees from banks, to swap them for dollars at RBI’s special swap window. This has also led to a spike in credit growth for the entire system,” explains Abheek Barua, Chief Economist, HDFC Bank.

All this explains why companies have been taking more loans, but what about individuals? Home loan companies say the 19 per cent growth in housing loans is due to first-time buyers, who don’t time their purchases to interest rate or economic cycles.

“The home loan segment is driven by first-time home buyers. Tier-II and Tier-III cities are seeing higher growth,” says Pant.

RETAIL LOANS GROW

Though the Index of Industrial Production shows shrinking consumer durable sales, credit to this segment grew 34 per cent in July and August. Players say the sudden spurt in loans shows that buyers are reducing cash purchases and depending more on credit.

Vehicle loans expanded 23 per cent in August, while automakers have seen only a 4 per cent growth in sales. Here, too, players explain that buyers are now using more credit than cash to purchase vehicles. Others say that banks have grabbed a chunk of this market.

“Vehicle purchases are made either fully on cash basis or financed by credit from the manufacturer or NBFCs or banks. With interest rates on the rise, banks have been able to offer better rates than NBFCs. Banks have also been able disburse loans quickly. Hence, there has been a shift in favour of banks which has led to higher growth,” says SBI’s Pant.

But others believe that this cannot be the sole reason. “The shift from NBFCs to banks has been happening for quite a while now, and it does not explain such a sharp increase in loans. We feel there is an anomaly in the numbers and there may be some downward revision,” says HDFC Bank’s Barua.

Overall, bankers warn that it may be best to not read too much into the August numbers but wait for sustained trends.

This article was published in B L on October 5, 2013

Mighty October :

Deals with Singapore Airlines & AirAsia: Ratan Tata’s aviation dreams finally takeoff

The Tata group’s push into aviation, will be driven by the passion of Ratan Tata.He will remain the broader force.'

 Binoy Prabhakar & Suman Layak, ET Bureau | 6 Oct, 2013, 06.45AM IST

In December 2012, about three weeks before he would retire as the head of Tata Group, Ratan Tata made a startling admission — he said the salt-to-software conglomerate was unlikely to ever enter the airline business. The reason that drove Tata to his decision was "destructive competition". "Overseas, people go bankrupt or companies go bankrupt. Here they never do, they continue to be sick and still operate. Then they are operating to kill you," he told PTI.

Compelling reasons as these were, the declaration was still unexpected on two counts. One, the Tatas have long held an unequivocal longing for the airline business — there is no better word to describe the group's trysts with the industry owing to a history of interruptions and obstacles — and it seemed it was going to remain that way. Two, the group was turning its back on the sector at a most inopportune time, at least from a regulatory standpoint.

The government had about two months earlier permitted foreign carriers for the first time to invest (up to 49%) in airlines in India, paving the way for businesses like Tata Group to launch a carrier with a partner in tow. Tata hadn't slammed the door shut in the face of aviation though. A few days later, in an interview to an inhouse magazine, he talked about an unfinished agenda in his career.

But he kept it under wraps, saying "it would not be fair to my successor..."

Today, ten months after those interviews, Tata Group is pressing ahead with not one, but two airline companies. The first, AirAsia India, a low-cost airline in partnership with Malaysia's AirAsia Bhd and Delhi-based Telestra Tradeplace that was announced in February, has collected all the government approvals and now requires only an operating permit from the aviation regulator for a launch sometime early next year. The second, Tata-SIA Airlines, is a full-service carrier for which the Tatas teamed up with Singapore Airlines in September.

Dream Come True

At long last, 13 years after his last shot at airlines was aborted, Ratan Tata is not just living a long-cherished dream — he is living it up. Tata had retired by the time AirAsia India was unveiled and he had apparently eased into a new role out of Bombay House, the Tata group headquarters, when Tata-SIA was created. But that would be to sell short the starring role he played in the creation of both the ventures, according to multiple sources with direct knowledge of the matter.

The two foreign partners, which first approached Tata with proposals to launch airlines in India in mid-2012 when the government was toying with relaxing FDI rules, came to him again in early 2013, said a person who was involved in the talks. "He recommended the proposals to Cyrus [Mistry, Tata's successor] and the Tata Sons [the holding company] board," he said, asking not to be named.

Since Tata hung up his boots, Mistry and his team have been dictating the group's airline strategy, but for advice and inputs, they still turn to the man whose passion and knowledge about aviation are unmatched in Indian business. "Few businessmen can boast the tremendous knowledge and a deep understanding of the aerospace industry that Ratan has," said Professor LordKumar Bhattacharyya, an adviser to Tata Group.

Yet, both enterprises run counter to Tata's statement in December. When Tata was first approached, he was cool to the idea of starting an airline because the government was yet to formally lift the FDI barrier. When it finally did in September, the "destructive competition" that he feared was rampant in aviation. The cutthroat price war thatKingfisher Airlines had waged that ultimately led to its grounding in October had wrought havoc on competitors and left the whole aviation industry in a flux. Even for an industry that has always been inherently risky, aviation stood out as an unalloyed disaster.

Perfect Setting

But the Tatas' partners were viewing Indian aviation with rose-tinted glasses. FDI by airlines apart, the civil aviation ministry had ushered in a raft of reforms, including abolishing a panel to vet the purchase of aircraft.

Kingfisher was firmly strapped to its deathbed, leaving in its wake wounded competitors and creating an opening for aspirants. Jet Airways, once the lord of Indian skies, was a shadow of its old self. Suddenly, an airline made immense sense. When the two foreign airlines approached Tata a second time, he lent a positive ear in the light of the changed circumstances, said another person familiar with the Tatas' game plan. "It was a natural thing to do: there is no one in the group who knows about aviation as much as him," he said. This person too preferred anonymity.

As it happened, an embattled government was eager to please investors. In less than a month of unveiling the alliance, the foreign investment regulator cleared AirAsia India's proposal.

On March 6, the day FIPB approved the AirAsia India proposal, Tata tweeted: "I applaud the govt. for its transparency and its principled implementation of the stated policy."

In April, Jet said it will sell 24% to Gulf carrier Etihad Airways, a deal that gained the unabashed support of the aviation ministry (the cabinet cleared the proposal on Thursday). Both developments emboldened the Tatas to pursue the venture with Singapore Airlines.

Hormuz P Mama, an aviation expert and aerospace journalist, said when Naresh Goyal ( Jet promoter) lobbied the government to permit investments by foreign airlines so as to push Etihad's investment in Jet, he may have unwittingly cleared the way for the formation of the Tata-SIA airline.

The decisions to launch the airlines were not strategic, said the second person familiar with the matter. "There was no Harvard textbook kind of strategising. Rather, they were purely opportunistic, made possible by deregulation in Indian aviation," he said. Tata, 75, excused himself from commenting for this article, saying he is overseas and his time is heavily committed.

The airlines complete the missing link in the Tatas' aviation business (see Tatas in Aviation). If ever there was an unfinished agenda in Ratan Tata's to-do list, it had to be an airline. Under Tata's watch, the group had grown furiously, creating assets in telecom, passenger cars and software and accumulating A-list businesses such as tea maker Tetley, Anglo-Dutch steel giant Corus and car brands Jaguar and Land Rover abroad.
The group spread wings in aviation too, stitching joint ventures to make aircraft parts or establishing private jet and airline catering companies. But the two attempts to enter the airline business (see Troubled Past...) were seemingly defeated by political resistance and corporate chicanery.

Accounts of how Tatas' bids were thwarted have been recounted several times in the past, but a few are worth a repeat. MK Kaw, the civilian aviation secretary when the Tatas sought to start an airline in 1997 teaming up with SIA, revealed in his book An Outsider Everywhere — Revelations by an Insider that the then aviation minister CM Ibrahim refused to clear the proposal despite policy papers being put up before him. Ibrahim has denied any wrongdoing.

Corporate Intrigue

Another revealing account came from the then disinvestment minister Arun Shourie at a seminar by industry lobby Ficci in 2001. The Tatas had sought to buy into government-owned Air India a year earlier. Shourie said, according to a report by The Indian Express, that Ficci's aviation panel had recommended that foreign investors in Air India should not hold more than 25% stake. "'Shourie then read out the recommendations of several parliamentarians, as well as those of the Standing Committee of Parliament — lo and behold, they were the same as Ficci's right down to the etceteras. "Great minds that think alike?" asked Shourie, "Or one great mind that was making everyone think alike?" He then named the head the Ficci panel — it was none other than Goyal of Jet.

Of course, the most telling comment about how his group's chances were scuttled came from Tata himself in 2010. Tata, who until then had carried himself inconspicuously for a chairman of an influential conglomerate, except for the odd big-box commercial announcement, said a businessman had told him in 1997 to pay Rs 15 crore to the minister if the Tatas wanted to start an airline. The unsuccessful attempts rankled Tata, according to friends. Bala Balachandran, a professor at the Kellogg School of Management at Northwestern University and a friend for 22 years, said Tata was very upset with politicians and bureaucrats "who in their selfish interest allowed competition to be curtailed". "Ratanji will never bribe anybody to satisfy his personal or business interests."

It is not hard to see why the setbacks hurt Tata personally. The group's association with aviation dates back to 1932 when it launched Tata Aviation Service, whose inaugural flight on a Puss Moth was piloted by JRD Tata, Ratan Tata's predecessor. JRD, who had grown up in France watching the famous aviator Louis Bleriot's early flights, and had taken a joyride in an airplane as a 15-yearold, was one of the first Indians to be granted a commercial pilot's licence, according to Tata chronicles.

Tata Aviation was the forerunner to Tata Airlines, which took the name Air India when it became a public company in 1946. Air India was nationalised in 1953, against the wishes of JRD Tata. Ratan Tata shared JRD's obsession for aviation. A trained pilot, Tata established a flying club in Jamshedpur when he was posted at Tata Steel.

JJ Irani, former managing director of Tata Steel, said the flying club was a rage in Jamshedpur. "It became such a fad that Russi Mody [a Tata veteran and former boss of Tata Steel] got his flying licence at the age of 50 and people started asking me why I was not getting one myself," recalled Irani.
Love Etc

Indeed, Tata's enthusiasm for aviation is renowned — FlightSafety, the Warren Buffet-owned aviation training company, uses Tata's endorsement as the first testimonial on its website — but the airline business remained elusive while he held the group's reins. The closest he ever got to the business was when he briefly led Air India as nonexecutive chairman in the eighties.

AirAsia group CEO Tony Fernandes said it was a common love for planes that brought him and Tata together. "When he flew me to Delhi on his jet you could see he was in his elements — free from everything and able to do what he loves. Seeing him in control of his own plane, I knew we couldn't have found a better partner. He is a true aviator."

Taking together his group's rich history and Tata's unbridled love for aviation, the two airline start-ups would only seem logical. But Morgen Witzel, author of Tata: the Evolution of a Corporate Brand, said one can make too much of the obvious interest. "It has been a long time since JRD Tata was chairman of Air India, and since then the Tata group has moved on."

Witzel shares the same view as the persons familiar with Tatas' talks with the partners. "More prosaically, I see opportunities in aviation at the moment, both in India and internationally. The main reason for this new venture must be to exploit a commercial opportunity."

In this context and accounting for his retirement, it would be easy to ignore Tata's role in birthing the airlines. The second person who sought anonymity said though it would not be entirely accurate to say RNT (asRatan Tata is addressed by associates) is solely behind the return of the group in the airline business, both ventures were driven to its formation by him. In the end, the foreign partners approached him due to his knowledge and passion for aviation, he said.

Post-retirement, Tata was insistent that the group is not locked to his legacy, according to friends and associates. So it was Mistry who took the final decision to partner both airlines. "He [Tata] is respectful of the current management and he doesn't allow his passion for aviation to cloud the commercial interests of the group," said an associate. Lord Bhattacharyya, a member of a panel that selected Mistry, said Tata doesn't interfere in the group's functioning in the classical sense, but discusses every decision with Mistry. "Remember, he's doing it for the group, adding another area of interest," he said.

The area of interest has radically changed, as Tata himself noted, from the occasions the group tried to enter aviation in the past. Kingfisher is grounded, but airlines are crushed between slowing demand due to a brutal slowdown and rising fuel prices and exorbitant airport charges.

Tough Market

But India's still-fledgling aviation industry is ripe for growth due to a small base of customers that fly, a characteristic from which the Tatas draw comfort. The airline seat per capita in India is only 0.07 compared with 3.35 of Australia, 2.49 for the US, 1.38 for Canada and 1.05 for Japan, according to aviation consultancy Centre for Aviation (CAPA).
A Tata Sons spokesperson said the group is and will actively participate in the management and operations of AirAsia India and Tata-SIA Airlines. "AirAsia India will fly passengers with one set of demands and needs and Tata-SIA Airlines will fly another set. When they begin operations, the differentiation, vis-a-vis existing operators in India and also between them, and its positive impact on either set of passengers will become visible," he said.

Taina Erajuuri, a Helsinki-based portfolio manager at FIM India, which owns shares in Tata Consultancy Services and Tata Motors, said from the context of catering to different market segments — an ultra low-fare airline and a premium airline — the Tatas have managed to get two of the best partners possible. "AirAsia has the lowest unit cost in the world and Singapore Airlines' expertise in running a full-service airline is unrivalled," she said. Tata-SIA can easily fill the vacuum created by Kingfisher, according to Erajuuri. "There is still a market for premium airlines in the key metro cities."

With the government displaying an unprecedented inclination to help airlines, Tata-SIA would benefit further if the rule of allowing airlines to fly international routes only after five years of flying on domestic routes is dropped.

On the face of it, these are happy tidings. So what do the airlines mean for the group? Purely from the perspective of the brand, Witzel said the airline business is not important in the short term. "The Tata brand would carry on being just as valuable without aviation. On the other hand, there is a risk that if things go wrong and the venture runs into problems, brand value could decrease," he said.

Despite the vast potential for growth, only one airline, IndiGo, is profitable. Some analysts share the view that the Tatas may have bitten off more than they can chew by launching two airlines. Though the group has stated that the airlines will not compete with each other, a confrontation on the domestic routes is inevitable.

India still remains one of the world's toughest aviation markets due to expensive taxation and price-sensitive customers. "Tata-SIA will be at a disadvantage against foreign carriers as long as the government's unwise taxation and micro-management policies continue," said Mama. But even he concedes the Tatas have the advantage of managerial expertise of SIA, one of the world's most respected airlines, as well as its own financial strength. Thanks to this combine, Mama said the airline will be able to resist competition from Gulf and European carriers.

Erajuuri said it is not for nothing that the Tatas are the most diversified conglomerate in India. "Tata is famously called the salt-to-software conglomerate. They manufacture Jaguars and Land Rovers and the cheapest car globally — Nano. The execution in all these businesses has been spot on. Hence, creating a new vertical through airlines is unlikely to be an execution challenge. They believe in creating a strong layer of management."

He's Around

Say things go wrong, there is help at hand. Ratan Tata has eased into retirement and is busy as ever, according to people ET Magazine spoke to for this article, but he has left no one in doubt about his availability to serve the group that he has assiduously shepherded over 21 years. (Tata is primarily pursuing philanthropic interests. He has also recently taken up positions on two boards, including an Ivy-league school in the US).

In June, AirAsia India said Tata has been named chief adviser to the board. Lord Kumar Bhattacharyya said Ratan has more time in his hands for the airlines now that he has given up the reins of the group.

Tata is closely following the progress of the airline ventures. "Delighted with fantastic response to AirAsia hiring of flight attendants. Great opportunity for young Indians. Makes me feel very proud," he tweeted on April 13. The second person who preferred anonymity said both ventures plan to use Tata's expertise when the need arises. "He could accompany executives for key meetings with government officials (Tata went with Fernandes and AirAsia India CEO Mittu Chandilya to meet aviation minister Ajit Singh and other senior ministers in July). If he feels the need to advise, it is up to him."

The Tata group's push into aviation, said this person, will be driven by the passion of RNT. "He will remain the broader force."

THE TATA PILOTS

Ratan Tata: The now retired chairman of Tata Sons, the holding company of Tata Group, is still the driving force behind the group's aviation game plan. Adviser to the board of AirAsia India, the low-cost airline in which the Tatas own 30%.

Cyrus Mistry: In his capacity as chairman of Tata Sons, Mistry will guide the group's thrust into the airline business. The decisions to partner AirAsia and Singapore Airlines were his.

R Venkataramanan and Bharat Vasani: Venkat, as he is known, the former executive assistant to Ratan Tata and Vasani, chief legal counsel of the group, represent the Tatas on the AirAsia India board.

Prasad Menon and Mukund Rajan: Menon, an old Tata hand who served as MD of Tata Chemicals and Tata Power, and Rajan, the chief ethics officer of Tata Sons and spokesperson of the group, represent the Tatas on the board of the venture with Singapore Airlines.