$1 billion loan no cakewalk for Adani group; SBI says company will have to repay Rs 5000 crore for fresh credit

Friday, 21 November 2014 - 7:30am IST | Place: Mumbai | Agency: DNA

Bulging credit

Rs 72,632.37 crore --Total debt as of September 30, 2014

Rs 8,999.92 crore total operating profit over last four quarter

Rs 5,733.77 crore interest on the debt

Amid uproar over State Bank of India (SBI) extending $1 billion loan to Adani group's ambitious Australian mining project, the lender on Thursday clarified that the group will have to first repay and prepay loans of about Rs 5,000 crore to get the fresh credit.

The net fresh lending to the group after due diligence to develop the $7.5 billion Carmichael coal mine project in Queensland, Australia, will be only $200-400 million depending on the repayments, according to SBI.
Arundhati Bhattacharya, chairman of SBI, said as of now this is only a memorandum of understanding (MoU).

"The company has to undertake repayments and prepayments. The loan itself is subject to techno-economic study, compliance with our credit policies and approval by the bank's board. The final decision will be based purely on commercial considerations. The project is good and will help in energy security as the quality of coal is very good. But Adanis have to repay a portion of the existing loan that we have extended to them. The net fresh lending will only be about $200 to $400 million," she told dna.

The coal mining project has a debt-equity ratio of 70:30.

"Unless the company brings in the equity, the bank will not give any funding. The Queensland government is also putting in some equity. Only after the equity part is ready, will the bank step in," said Bhattacharya.
The loan is being extended to Adani Mining, the Australian subsidiary of Adani Enterprises, for the mine, which has massive blocks of untapped coal reserves.

Adani Enterprises has won support from the Australian state and an MoU from SBI for the coal mine project, despite a slump in coal prices to five-year lows.

Promoter Gautam Adani is also banking on Australia's big four banks along with export credit agencies of Korea and the US for a financial closure of his most ambitious project. Up to $1.5 billion is expected to be raised from South Korea's export credit agency as theAdani Group has awarded a $2-billion contract to Korean company Posco to construct the 388-km railway line to connect the Carmichael mine to Abbot Point.

Prime minister Narendra Modi met Queensland premier Campbell Newman in Brisbaneculminating in a commitment from the government there to take short-term, minority stakes in Adani Group's rail and port infrastructure projects.

Despite such assurances from SBI, the potentially huge lending has created an uproar in India and critics have accused the lender of favouritism. Experts are also worried at the huge debt that the Adani group has piled up.

According to analyst Vivek Kaul, as on September 30, 2014, the total debt of the group stood at Rs 72,632.37 crore. Total operating profit of the group over the last four quarters was at Rs 8,999.92 crore. The interest on its debt was Rs 5,733.77 crore.

"This means an interest coverage ratio of around 1.57. Interest coverage ratio is essentially the earnings before interest, taxes and exceptional items (or operating profit) of a company divided by its interest expense. It tells us whether the company is making enough money to pay the interest on its outstanding debt. The lower the interest coverage ratio the better the situation of the company. Also, the moment the interest coverage ratio starts hovering around 1.5, the ability of the company to keep paying interest on its debt becomes questionable," Kaul said in his blog.

Also, a matter of concern is the growing NPA of public sector banks. Deepak Shenoy who runs www.capitalmind.in said the net non-performing assets of the 12 banks that are a part of the 50-share Nifty Index rose by 13.31%, for three months ended September 30, 2014, in comparison to the same period last year.

The Carmichael project has been facing the ire of environmentalists in Australia too because of potential danger that the mine will cause to the Great Barrier Reef.

Meanwhile Congress party on Thursday questioned the decision of SBI to give $1 billion loan to Adani during PM's visit to Australia, according to PTI.

"What was the propriety of the SBI giving the loan to Adani, who was sitting next to the prime minister during the visit, at a time when some five foreign banks have denied credit to the group for the project?" party general secretary Ajay Maken said. He alleged that the PM appeared taking keen interest in "promoting" Adani in getting the loan worth Rs 6,200 crore during the visit in which the SBI chairman was also present.

"When five top foreign banks have already declined to fund Adani's project, what was the need and the sense in giving such a huge loan to him from the hard-earned money deposited by the common people? Did the SBI do the due diligence? If it did so why it is not declaring the MoU? On what conditions it was done? And what was the liability?" Maken said.

He also saw contradictions in the PM's thrust on coal mining in Australia and the coal minister Piyush Goyal's statement that India will be able to stop import of coal in the next two years.

SBI’s $1 bn promise to Adani group: The public bank has a lot of explaining to do

Dinesh Unnikrishnan. F BIZ 22 NOV 2014

The Rs 6,200 crore loan agreement the State Bank of India (SBI) signed during Prime Minister Narendra Modi's Australian visit to fund Gautam Adani’s Carmichael coal project in Queensland has been questioned on the basis of its merits, with the proposal evoking sharp criticism from Congress party as it alleged that Modi is promoting Adani and is using the government lender to come to the aid the industrialist.

The critics have primarily the following questions: Why did SBI decide to give a $ 1 billion loan to a project, whose previous attempts at fund raising were was turned down by several international banks who cited non-viability of the project? Also, Adani's bigger coal rivals in Australia, such as BHP Billiton and Glencore, have shelved coal developments in the backdrop of Australia's coal industry making losses. What is the guarantee that SBI won’t burn its hands by lending to Adani for such a project?

SBI has defended its position saying it has only signed a memorandum of understanding with Adani to extend credit facilities. The actual disbursement will happen only after assessing the details of the project and being convinced about the merits, the lender said.

According to SBI chairman Arundhati Bhattacharya, after repaying an existing loan to the bank, the net fresh funding to Adanis will be $200 to $400 million (about Rs 1,200 crore to Rs2,500 core).

Probably, here are the larger concerns that SBI should address:

One: Using part of the fresh loan from the same lender primarily to repay an old existing loan amounts to ever greening of the loan or clandestine restructuring, something which the Reserve Bank of India (RBI) has been cautioning banks against over the years. That is particularly important if the future cash flows from a particular project, for which the money is given, is doubtful.

Two, if the $ 1 billion loan is indeed intended for the Carmichael coal project and the partial repayment is for loans drawn earlier for other projects in the group, then that becomes a case of a diversion from the stated end-use ( assuming that the stated use in this case is the development of the Carmichael project.) Is that the case?

Or else, if it is a top up loan for the same project, it would, in fact, add to the repayment burden of the company since the total outstanding increases if the project doesn't turn out to be profitable.

Ever-greening has been a problem with the Indian banking sector and is the reason for pile up of hidden stressed assets in the form of restructured advances.

Any banker would admit that of the Rs 6 lakh crore of loans are currently being recast under various channels—bilateral restructuring and corporate debt restructuring—there is a significant chunk of hidden bad loans. The reason is that in several cases companies didn’t deserve loan recasts and got the facility through understandings achieved in state-run banks thanks to political influence.

In such cases, what really happens is a bank loan, which is practically a bad loan, is maintained as a standard account through some sort of top up loan or easing of norms. This is done in the mutual interest of the lender and borrower. Let’s admit that Indian banks are neck-deep in bad loans and the problem is huge. It's high time caution is exercised.

About Rs 2.6 lakh crore of the total loans given by banks are already bad. Besides the genuine reasons such as economic slowdown, a major part of the bad loans can be attributed to careless, imprudent lending by banks to large corporations.

As at end September, Adani enterprises have total debt of Rs 72,632 crore, which includes long-term debt of Rs 55,365 crore and short-term debt of Rs17,267 crore. As an earlier Firstbiz article pointed out, the group’s ability to repay its debt obligations is perceived to be weak as reflected in its declining interest coverage ratio.

RBI governor, Raghuram Rajan, in the past had highlighted the danger of rampant evergreening on stressed assets.

“Ever-greening is trying to ignore the problem and taper over for later period and thus create large problems in future,” he had said.

In Adani’s case, given the political and public attention on the deal, SBI will be complicating the whole affair if it is not clear on the actual use of the promised money.

There is not much strength in SBI’s argument that the transaction is not done and it is just an agreement. Such a major proposal, announced at a foreign venue presided by heads of nations, must be followed up with actions. The question here is where exactly will the money SBI plans to give Adani group be deployed?

If a good chunk of the money goes to clean up the balance sheet of Adani and evergreen its old debt, the whole exercise will set yet another bad precedent in Indian banking, which is presently struggling to tide over a bad phase.

Overseas borrowed funds : RBI says overseas borrowed funds can be parked with banks in India

Mint – Sat, Nov 22, 2014

The borrowers are required to bring the proceeds meant for rupee expenditure such as payment for spectrum allocation, capital goods into India

 Reserve Bank of India (RBI) on Friday allowed companies borrowing overseas to park the funds as term deposits with local banks for a maximum period of six months.

In a notification on its website, the central bank said this facility is available for entities that have borrowed funds for permitted end uses such as local sourcing of capital gods, on-lending to self-help groups or micro-credit and payment for spectrum allocation, among others.

"No charge in any form should be created on such term deposits i.e. to say that the term deposits should be kept unencumbered during their currency," RBI said in its notification.

Such deposits should be exclusively in the name of the borrower and they should be available for liquidation as and when required, the regulator said.

RBI stated that the amended policy would come into immediate effect and all other aspects of the external commercial borrowing (ECB) policy would remain unchanged.

On 3 September, the banking regulator had eased certain ECB norms by allowing non-resident lenders to extend rupee loans to borrowers in India, after following certain norms regarding currency swaps with local banks. Prior to that, all eligible borrowers were allowed to raise ECB funds in rupees only from their foreign equity holders.

As per latest monthly data available on the RBI website, Indian corporate entities borrowed $2.56 billion worth of ECB loans in October 2014. Of this, Reliance Jio Infocomm Ltd and Tata Motors Ltd had both borrowed $750 million each through the ECB route.

Credit cards :RBI Issues Clarification on Credit Cards

 PTI  22 Nov 2014

Credit cards issued by the Reserve Bank of India! Yes, that's the latest trick fraudsters are using to dupe hapless people, the central bank has found recently.

"The gullible member of the public is sent a credit card which allows withdrawal of money up to a certain limit, albeit a small sum, from a bank account," RBI stated explaining the modus operandi in its notice.

"Having gained the confidence of the victim thus, the fraudster gets him to deposit a huge sum of money in the same bank account. Once the money is deposited, the card stops working and that would also be the last time the holder of the card (victim) would hear from the fraudster," the central bank added.

The Reserve Bank was forced to issue a notice on Friday after the fraud came to light. It reiterated that India's central bank does not carry out any business with an individual, whether through savings bank account, current bank account, credit card, debit card, online banking services or receiving and holding funds in foreign exchange or any other form of banking services.

The Reserve Bank also asked public to be cautious about such fictitious offers being made in name of International Monetary Fund (IMF), income tax authorities, customs authorities or public figures like Governor, Dr. Raghuram Rajan or other senior RBI officials.

In recent years, the Reserve Bank has been target of many such scams. Last November, emails circulating in the name of Governor Rajan asked recipients for "fund release order fee charges" of Rs 9,500. Such mails also solicited other personal information like residential address, mobile phone number, bank account and PAN card details.

Earlier this year, Dr Rajan exhorted members of the public to use social media in identifying such frauds.

"Can we enlist social media in enabling the public to identify fraud and can we as regulators filter that information in careful and responsible way so that we can collect information about what is happening and react to it?" he had said at the annual Nasscom leadership conference in Mumbai.

The Unsung Billionaires :Qimat Rai Gupta Of Havells India

Bhupesh Bhandari  | B S : New Delhi  November 20, 2014 

Two weeks ago, Qimat Rai Gupta of Havells India passed away quietly. Born in a low-income family of Malerkotla in Punjab, he was worth almost $2 billion when he died at the age of 77 after a cardiac arrest. Yet the businessman kept a low profile and stayed focused on his work. He created minimum fuss in life - and in death.

 He always looked contended and unhurried; at times, he came across as rather taciturn. Yet he ran Havells with authority. There was never any doubt that he called the shots in the company. He would take stock of the situation every morning in a meeting with his key executives, including his son (Anil) and nephew (Ameet). 

Nobody dared to skip these meetings. His house inCivil Lines was big but not ostentatious. He travelled in simple cars, though he could easily afford the most expensive set of wheels in the world.

That's because people from humble origins know fortune is fickle. And Gupta's roots were truly modest. Early in life, he had even sold oil on a cycle in the villages of Punjab. 

In 1958, he moved to Delhi and, along with a relative, started a shop for electrical equipment at Bhagirath Place, a crowded market in Old Delhi. Over the next decade or so, he painstakingly built the business. His big opportunity came in 1971 when he acquired a company called Havells. 

Contrary to the perception that the name is of German extraction, Havells is the anglicised name Haveli Ram Gandhi, grandfather of fashion designer Rohit Gandhi, gave to his switchgear company when he started it several decades ago. 

He subsequently sold the company to Gupta, who was one of his distributors. There was no looking back for Gupta after that. From switchgear, he diversified into newer areas like cables, lightings, appliances, fans and geysers.

When I first met Gupta, he used to operate out of a cramped office in Civil Lines. The interiors may have been chaotic, but the energy was palpable.

Cubicle walls had gaps so that senior executives could talk and exchange papers quickly. Some years ago, the company moved lock, stock and barrel to a swank 130,000-square-ft office called QRG Towers spread over 3.5 acres in Noida. This was also the time Gupta decided to reinvent the company. 

He realised that Havells was competing with strong brands in the market: Philips and Osram in lighting; Crompton Greaves, Orient, Polar and Khaitan in fans; and Finolex in cables. Still, most of the rivals did not spend more than one or two per cent of their turnover on brand promotion. Moreover, a large part of their promotion was below the line.

 In 2007, Gupta decided that if Havells had to break the clutter, it would have to radically outspend rivals. From around Rs 15 crore, the budget for brand building was bumped up to Rs 60 crore: over four per cent of the company's then turnover. It signed on Lintas Lowe to devise a campaign, and R Balki, the agency's chairman and chief executive, personally supervised it.

The brand, it was decided, would talk to men between 25 and 45 years of age (electrical fittings are selected by men, tiles and bathroom fittings by women), and for that, cricket would be the right medium. Fortunately for Havells, that was the time India had done badly in the World Cup in the West Indies. Cricket properties were going dirt cheap, and Havells was able to strike some amazing advertising deals.

 Ever since, Gupta kept the bar for advertisements high. Some didn't work, like the one for Havells fans that showed people wading through a pool of sweat, but mostly they were of a high quality. One immediate benefit was that the discount at which Havells sold its lamps and fixtures to market leader Philips soon vanished.

Gupta's biggest challenge came soon thereafter. In 2007, Havells acquired Sylvania for euro 227 million. Not only was it his first overseas foray, but Sylvania was much bigger than Havells. Digesting the acquisition was never going to be easy.

 The slowdown of 2008 drove Sylvania into the red. As a result, the share price of Havells crashed to a third. There was pressure from the banks to infuse capital into Sylvania to resurrect it, which would have bled Havells further.

 Some advised Gupta to sell off the company and cut his losses. Still others told him the new office in Noida was unlucky and he should get rid of it as quickly as possible. Instead, he decided to take the challenge head on.

One day in December 2008, Gupta summoned Anil and Ameet to his office and read out the riot act to them. Sylvania's plummeting performance, he told the two, was a blow to Havells' reputation. If they cannot turn it around, they would never again be able to do any acquisition. No banker would ever support them again. 

It was a challenge, but also an opportunity to prove their mettle. They had, Gupta told them in no uncertain terms, not run Sylvania well and had been happy to play the role of a financial investor. Over the next few months, the duo consolidated in South America, downsized in Europe, relocated the nerve centre from New York to Noida, and migrated production to low-cost factories in China and India. By 2010, Sylvania had turned the corner.

Gupta had an extraordinary life, and he chose to live it away from the limelight.

Merger and Acquisition :Future Group acquires supermarket chain Nilgiris

Raghavendra Kamath  |  Mumbai   B S :

November 21, 2014  11:57 IST

Deal size expected to be between Rs 175 to Rs 200 crore

Kishore Biyani-led Future Consumer Enterprise (FCE) today said it has bought a 97.97% stake in Bangalore-based supermarket chain Nilgiris from UK-based private equity firm Actis. 

 

Though the company did not disclose the deal value, it is believed to be between Rs 175 crore and Rs 200 crore. 

 

With this deal, The Nilgiri Dairy Farm, the retailer's operating company, has become a subsidiary of FCE.

 

Set up in 1905, Nilgiris is majority owned by Actis. Promoted by the Mudaliar family, Nigiris became a portfolio of Actis when the latter bought 65% stake in 2006 for $65 million and subsequently increased its stake. Actis has been looking to exit the investment since 2012.

 

The acquisition is expected to help Future Group in multiple ways. Foremost, it will help the group expand its presence in the South and compete with retailers like Aditya Birla  that have a stronger presence there. Currently, Future Group is predominantly West and North focused.

Nilgiris runs 140 stores in Karnataka, Kerala, Tamil Nadu and Andhra Pradesh.

Future Group said the deal will help expand its existing footprint of convenience stores via a franchise model. 

 

"With this acquisition, the company expects to expand geographically by increasing its footprint of convenience stores in south India," FCE said today.

 

Future Consumer Enterprises’ existing portfolio of brands including Sunkist, Tasty Treat, Golden Harvest, Premium Harvest, Sach Ektaa, CleanMate and CareMate, will be retailed through Niligiris network. Also, Niligiris' branded bakery and dairy products will be retailed across Future Group’s existing channels including Big Bazaar, Foodhall and Aadhaar and also extended to other modern retailers.

 

Kishore Biyani, Group CEO, Future Group, said, “This acquisition is synergistic as it enables strengthening and expanding convenience stores through franchises in an asset light model as well as brings in new manufacturing capabilities and brands within the company.”

 

Future Group has convenience stores under KB's FairPrice. It is not known whether it will rename Nilgiris into Kb's FairPrice.

Kotak Mahindra Bank to acquire ING Vysya Bank in an all Stock Deal

 

 PTI 20 Nov 2014 6.00 pm

Kotak Mahindra Bank today decided to acquire mid-sized lender ING Vysya Bankin an all-share transaction to strengthen its position ahead of entry of new players. 

The Uday Kotak run bank said the consolidation was founded on leveraging "significant complementaries that exist between the two banks." 

The merger would be done through a share swap in which 725 equity shares of Rs 5 each of Kotak Mahindra will be issued for every 1,000 shares of Rs 10 each held in ING Vysya Bank. 

"Post amalgamation, shareholders of ING Vysya Bank will receive shares of Kotak Mahindra Bank in the aforementioned ratio, resulting in change in shareholding of the Kotak Mahindra Bank," a statement from Kotak Mahindra Bank said. 

The transaction would be subject to approval of shareholders of both the banks as well as statutory approval from RBI and Competition Commission of India, it said. 

Netherlands-based ING holds 42.73 per cent stake in ING Vysya Bank through two investment vehicles routed through Mauritius. 

ING Vysya Bank shares closed 7.15 per cent at Rs 814.20 per on the BSE ahead of the announcement which came after trading hours. 

Uday Kotak        ✔ @udaykotak

Follow

I am excited to announce the merger of Kotak Mahindra Bank & ING Vysya Bank, subject to approvals. We will work to create stakeholder value.

5:48 PM - 20 Nov 2014

Kotak Mahindra Bank too jumped by 7.28 per cent to close at Rs 1,157.05 per unit at the BSE. 

The statement further said: "this revenue synergy led and growth oriented amalgamation, adopting the best practices of the banking, governance and prudence from both banks is expected to result in a superior platform benefiting from efficiencies of size and scope over time for all shareholders, customers and employees."

Chennai realty: Indiabulls buys 10-acre commercial building for Rs 600

In one of the biggest commercial deals in South India, Indiabulls Distribution Services Ltd, a subsidiary of Indiabulls Securities Ltd, has bought a 10 acre commercial complex in Chennai for Rs 600 crore ($97 million).

The India Land Tech Park in Ambattur will be renamed One Indiabulls Park. Indiabulls is looking to fund the transaction through internal accruals and private equity funds.

The commercial complex consists of 3 towers with a total constructed area of 2.4 million sq ft and leasable area of 2 million sq ft, translating into a transaction value of Rs 3,000 per sq ft of leasable area.

India Land and Properties is owned by Americorp Group, a global investment management company headquartered in Madrid, Spain. An ISO 9001 2000 certified company, India Land says it is working with the primary objective of promoting world-class infrastructure projects in India.

Current tenants of the complex include Royal Bank of Scotland, Kone, Britannia Industries, Ajuba, Covenant, Telebuy and Ibox.

]The Indiabulls-India Land deal is the second highest realty deal in Chennai. The highest ever commercial deal in the city to date, is by private equity firm Xander in Shriram Property's IT SEZ for Rs 690 crore. In October, Flipkart signed one of the biggest commercial real estate deal in India when it took 3 millions sq ft space in Embassy Tech Village in Bangalore.

In fact it seems that South India has pipped the north and west when it comes to commercial real estate. From January to September, almost 50 percent of new office space deals were struck in Chennai, Hyderabad and Bangalore,

Chennai recorded a 50 percent quarterly growth in the July-September period, with some of the bigger transactions involving properties like the Prestige Palladium in the heart of the city, the DLF IT SEZ, approximately 5 km from the airport; and along the city's upcoming it corridor in Sholin-Ganallur where a contract research firm scope international signed up 96,000 sqft .

Moreover, rentals have risen by 25 percent Y-o-Y and 15 percent-plus Q-o-Q in IT SEZs in localities like Velachary, Perungudi and Poonamallee Road.

 FBiz :Nov 20, 2014

Appointing a PSU bank chairman

Krishnamurthy Subramanian : Live Mint :THU, NOV 20 2014. 05 25 PM IST


To stem the rot in public sector banks, the government should create a professional process for appointment 

Following the arrest of S.K. Jain, the former chairman of Syndicate Bank, the government has modified the selection process for the appointment of chairmen of public sector banks (PSBs). This process has effectively added more layers of bureaucracy in the form of three screening committees (instead of one earlier). Rather than tinkering with a failed system, and possibly making it worse, the government needs to institute a process that incorporates the best practices for the selection of the leader of a PSB.

Unlike the case of a private sector bank, where the selection process follows an extensive search that is usually handled by an executive search firm, no search process is stipulated in the case of the selection of chairmen of PSBs. A shortlist is generated based on certain demographics of general managers in all PSBs, such as age, number of years of experience as general manager, etc. This shortlist is then screened for potential cases of corruption or vigilance enforcement. The shortlisted candidates are interviewed usually for 15-30 minutes before a decision is made on the eventual candidate. Given the difficulty in judging the candidate in such a short span of time, rumours abound about the outcome being pre-decided based on political affiliations/extraneous reasons.

Several aspects of the current process render it sub-optimal. First, government officers and regulators are unlikely to possess the skills necessary to judge the potential talent necessary for someone to lead a bank with assets of Rs.5 trillion or more. Banking is a very specialized activity, and top management needs to combine strategic foresight with a good commercial knowledge of sectors to lend to, prudent risk management and human resource skills. For highly skilled activities, selection by a peer group generally ensures that those who select have the ability and discernment to assess the required attributes.

For example, if the selection of the Indian cricket team for the forthcoming cricket World Cup is left in the hands of the Board of Control for Cricket in India (BCCI) administrators rather than the selection committee comprising former cricketers, one can only shudder to think about the potential performance of the team. Just like a cricketer representing the national team requires special skills, the chairman of a PSB also needs enormous skills of leadership, persuasion, risk management, people management, etc. Former cricketers who have played the game at the top level comprise the selection committee for the Indian cricket team. Similarly, only someone who has been the chief executive officer of a large bank can understand the skills required for the job. No bureaucrat, politician or regulator can possess the skill to judge whether or not a particular candidate has the necessary ability. The current perception that the selection by such a peer group is unnecessary for top management positions in PSBs fails to recognize the specialized nature of banking and (in the context of government appointments) lends itself more easily to abuse.

Second, the way the selection committee is presently constituted leads to inadequate interaction with the shortlisted candidates. Consider the process of appointment of assistant professors in research-oriented universities. Because research requires application of diverse skills, a prospective candidate spends an entire day meeting and interacting with every research-oriented faculty in the department for 30 to 45 minutes. The one-on-one interaction provides multiple opportunities for each individual faculty to evaluate the candidate. A follow-up discussion where each individual faculty shares his/her assessment of the candidate leads to a rich assessment of the candidate’s attributes. Similarly, interactions with each member of a selection committee, comprising former bankers, would better assess the potential for leading a bank.

The Nayak committee’s recommendations in this context are worth considering. Till the time that the boards of PSBs are professionalized, the committee recommended setting up of a Bank Boards Bureau (BBB), which would advise on top bank management selection. BBB will comprise senior or retired commercial bankers. It should ideally comprise a compact set of three bankers, of whom one would be the chairman. As this would be a full-time position, serving bank officers would need to resign, if chosen. For the process to carry credibility, it is important that the chairman and members be of high standing and should have led banks. Their choice should be made by the government in consultation with the Reserve Bank of India (RBI). As the appointments to the top management of banks will continue to require the concurrence of the appointments committee of the cabinet, it is desirable that BBB’s recommendations be generally accepted by the government. In cases where the BBB’s recommendations are not followed, BBB should be mandated to make a public disclosure of recommendations that were rejected by the government.

To stem the rot in PSBs, the government would be well advised to create this professional process for appointment of top management in the PSBs. Given the precarious position of PSBs and the substantial amount of capital that the government may have to provide in the next five years, such a step has become a sine qua non.

Krishnamurthy Subramanian teaches finance at the Indian School of Business and was a member of the P.J. Nayak Committee on governance of bank boards.

Dear Jaitley, don't be a Chidu; forcing banks to lend now to corporates can backfire

Finance minister Arun Jaitley met the chiefs of public sector banks in Delhi today (Thursday) to discuss the performance of government banks, the problem of rising bad loans and, more importantly, lack of credit flow to corporations critical to kick start projects. At the meeting the minister asked bankers to restart lending to stalled projects.

The meeting happened in the backdrop of a strong caution from the Reserve Bank of India (RBI) on Wednesday about the potential risks of a sharp growth in the retail lending in the recent months, especially to the consumer durables segment.

The apex bank fears that pushing too much credit to the retail customer, beyond his absorptive capacity, could lead to over-indebtedness and resultant stress on the books of banks.

The RBI’s concern is justified if one looks at banks’ rapid credit expansion to retail segments in the last one year.

Let’s take a look at the numbers. Bank loans to the consumer durables segment grew by 48 percent on a year-on-year basis (38 percent a year ago) in the 12-months ending September, whereas the overall non-food credit growth stood at a mere 8.6 percent.

Similarly, credit card outstanding grew by 17.4 percent on year in the 12-months period as compared with a mere 2.1 percent in the corresponding period last year. Vehicle loans grew 18 percent, slightly lower than 23 percent in the previous year. Housing loans grew 15 percent compared with 20 percent.

Why have banks suddenly developed a liking to the retail segment?

In the face of lacklustre demand from corporations, banks have clearly found a saviour in the retail customer, where there is still some demand.

Also, overall credit growth continues to lag behind the deposit growth significantly. This adds to the carry cost of banks, forcing them to deploy the funds somewhere. In fact, the real reason for the deposit rate cuts by banks in the recent past is to discourage fresh deposit flows.

Banks are already over-invested in government securities with average SLR holding somewhere about 28 percent compared with the minimum 22 percent. So avenues to deploy funds are limited.

From a risk perspective as well, salaried individuals have better repayment record compared with companies. Banks’ retail bad loans have been insignificant compared with that from corporate loans. That explains the rise in the loan exposure to individuals to buy cars, two-wheelers and apartments and other consumption-related needs.

But the RBI is clearly worried that pushing too much credit to the retail customer can lead to a breaking point, such as the one happened in the microfinance sector some four years back.

The microfinance movement, which took birth in the mid-90s, came to the rescue of millions of low-income households, who did not figure on banks' radars. Micro-finance companies offered small-ticket loans to these unbanked poor to fulfill their financial needs.

But eventually the dynamics of the microfinance changed when private equity firms sensed a bsuiness opportunity in the sector. Profit-motive outweighed livelihood promotion in the agenda of microlenders. The companies began pushing multiple loans to the same borrower to grow their book. This chain logically collapsed in 2010 when loan recovery practices were questioned by state and central governments.

RBI, logically, doesn’t want to let a retail loan bubble growth in the commercial banking industry.

Why are banks not lending to companies?

As Firstbiz had highlighted before, practically, there is no demand from corporations even after the revival talk. After a long time, one big-ticket loan happened in India when SBI recently agreed to extend a $1 billion loan to fund Adani’s Australia coal project. The decision of SBI to give the loan to a seemingly loss-making segment, from where other banks have largely stayed away, has been questioned.

Credit growth is near-stagnant to industries, especially to medium- and large-sized firms. Loan flow to mid-sized companies shrank 2 percent in the 12-month period until September and those to large firms grew by a mere 4.7 percent compared with 18 percent in the previous year.

Any strong revival in economic activities can happen only when banks loosen their purse strings to companies and real action begins on the ground. Several stalled projects are still not back on track and new projects are yet to happen, according to bankers Firstbiz spoke to.

Seen in this context, the finance minister's subtle push on banks to resume lending to projects assumes significance because he is committing the mistake his predecessor did -- micro-managing the state-run banks. Its best to leave banks do their business.

During the UPA's regime, the finance ministry used to interfere in the functions of the public sector banks, influencing their business decisions on critical aspects such as credit offtake and loan pricing. In their desperate bid to meet the credit growth targets, which were reviewed in periodical meetings, they resorted to careless lending.

The result is for everybody to see. Much of the reasons for the current spike in the bad loans is because of the reckless lending they did.

The link is very clear: when the single-minded focus is expansion of loan book, credit quality suffers and bad loans pile up. At present, Indian banks are sitting on about Rs 2.6 lakh crore of bad loans, of which over 90 percent is on government banks' books.

But Rs 2.6 lakh crore is only one part of the story. Apart from these, there are about Rs 5-6 lakh crores of restructured assets. A significant chunk of the restructured assets are hidden non-performing assets (NPAs).  Bad and restructured loans impact the profitability of banks and significantly add to their capital requirements.

Before prodding the banks to lend to corporates, what the government should do is, find ways to resolve the structural bottlenecks that delay projects and prevent firms from coming up with fresh proposals. A real revival on the ground will result in genuine demand for fresh money.

It is unlikely that any bank will consciously block money to a good project -- one from which return is guaranteed. On the other hand, forcing state-run banks to lend more to any particular segment undermining the risks and influencing their business decisions can boomerang.

By Dinesh Unnikrishnan    FBiz 20 Nov 2014