Anyone watching India’s large business houses jostling each other for a new banking licence would think that running a bank is a cakewalk. And it probably was, when the times were good.
You collected thousands of crores in deposits from the public, using ‘safety’ as your trump card. You paid the bare minimum as interest, because the depositor really had nowhere else to go. You then lent this money back to the public at stiff rates, in the form of housing, auto or personal loans, with hefty collateral.
What made this whole retail banking model quite lucrative is that you could collect deposits at fixed rates, but lend them at market rates.
You could (if you chose) lend to industrial houses too. But evaluating corporate borrowers may not always be easy. In that case, you could park your excess money in SLR (statutory liquidity ratio) securities and still earn a risk-free 8 per cent. But in the last couple of years, high inflation and the persisting economic slowdown have combined to expose the chinks in this wonderful business model.
Savers shun deposits
Retail investors, for one, have woken up to the fact that they are paying a stiff price for the apparent safety of bank deposits — the deposits don’t offer interest rates that manage to beat inflation.
Savers, therefore, have been cold-shouldering deposits and turning away instead to any and every avenue that offers a better ‘real’ return (pun unintended) — gold coins, chit funds, even ponzi schemes.
In fact, trends in household savings in the last three years clearly show that retail savers have begun to actively switch their money between different investment avenues, based on interest rates, to earn the best returns.
Industrial borrowers, who earlier used to line up for bank loans, are no longer at the mercy of banks either.
Borrowers seek haircuts
The top-notch borrowers can easily raise foreign loans at lower costs. The more doubtful ones have the bankers jumping through hoops to recover their loans.
Companies that have binged on loans have seen a sharp erosion in their debt servicing ability in the last two years, thanks to steadily dwindling sales and sluggish profit growth. They have responded, not by cutting back on debt, but by taking on yet more debt to keep the business going.
Business Line’s recent analysis of 500 leading companies with leverage showed that these companies increased their debt by 17 per cent, while their net worth grew only by 9 per cent in 2012-13. Half of these companies saw their leverage worsen, with a few sporting debt-equity ratios of over 8 times (2 is the accepted norm). Large industrial houses don’t mind going overboard on borrowings, because once they manage to become a particularly large ‘exposure’ for the bank, they are on the velvet.
If you are unable to repay the loan, you simply apply to your lenders for ‘restructuring’. Having made the application, you can move on with your life.
You can travel the country in great style, bid aggressively at IPL auctions, do deals with foreign partners and even sue the lenders for defaming your character, if they complain too much to the media about your overdue loans.
India’s draconian debt recovery laws will make sure that it is the bank, and not the promoter of the failing business, which takes all the ‘haircuts’ and makes all the sacrifices necessary to salvage the most of this bad bargain.
Banks on their part have to make a devil-or-deep sea choice when approached by such borrowers. If they refuse and move to recover the dues at a court of law, the case may drag on for years and the asset may have lost all value by the time the bank gets its hands on it. If they decide to accommodate the borrower through easier terms, the envelope gets pushed a little more.
Thanks to this situation, Indian banks are today estimated to be sitting on Rs 2.5 lakh crore of restructured loans, on top of the Rs 1.6 lakh crore of non-performing assets that figure in their books. Distressed accounts now make up nearly 10 per cent of the combined loan book.
RBI’s pound of the flesh
If collecting deposits and loaning it to the credit-worthy has become a tricky endeavour, the regulators have not been making bankers’ lives easier either. In recent times, the Reserve Bank of India has co-opted the banking system as its unwilling partner in fixing everything that is wrong with the Indian economy.
Faced with the problem of a depreciating rupee, it jumped to the conclusion that it is bank money which is fuelling all that currency speculation. It promptly moved to squeeze every drop of excess liquidity from the banks. No matter if the sudden increase in overnight rates has sharply escalated the banks’ costs or aggravated the bad loan problem.
Faced with a trade deficit, it is banks once again that the RBI has been relying on, to forcibly curb the Indian savers’ appetite for gold.
It first asked banks to stop their gold retail business and make sure that gold was imported only to make jewellery. Then it required them to resort to cash-and-carry sales of gold consignments. Now, the RBI actually expects banks to police the jewellery industry and ‘ensure’ that the jeweller fulfills his export obligations!
All this has made banking stocks a no-no for stock market investors too. Over two-thirds of the listed banks today have their stock prices languishing below their book value. An equal number generate a return on equity of less than 15 per cent.
New kids, new rules
There is already an onerous set of conditions put in place by RBI for the grant of new banking licences. There are minimum net worth and capital limits, rules on accounting, provisioning and disclosures and mandatory SLR and CRR balances, of course. But, even as the older banks struggle to make a viable business of lending to the existing set of borrowers, the central bank now wants the new banks to meet the 40 per cent priority sector lending norms from day one. They also have to set up a fourth of their branches in un-banked areas.
So, the question is, what were India’s leading business groups thinking of when they threw their hats into the ring for new banking licences. Compared to this, isn’t operating an oil refinery or executing an EPC contract a far simpler proposition? Why would anyone want to run a bank?