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Business in choppy waters

The why, what and how-to of policy making.

By Balaji Chandramouli | Print Edition: July 15, 2007

The why, what and how-to of policy making.

Can the Left 'bank' elsewhere?

In a season that is awash with public offerings, the overwhelming market response to the recent follow-on public issue by ICICI Bank stands out for more reasons than one. First, the mop-up is a perfect response to the changing market dynamics where banks are forced to pursue business in choppy waters-by continuing to lend to risky sunrise sectors like real estate and retail. They need funds for this as well as to provision for the increased attendant risks, as mandated by the regulator.

For ICICI Bank, this growth route will, in all probability, improve its net interest margin (NIM)-the difference between the interest rate charged on loans and the interest paid out on deposits. ICICI Bank's NIM stands at 2.6 per cent, about 1 per cent lower than the industry average of around 3.5. Further, the additional capital will also help fend off the vagaries that RBI's monetary policy imposes on the banking system-of late, in its attempt to combat inflation, RBI has been stemming credit flow, which, till recently, was rising at over 30 per cent per annum, by increasing the cash volume that the banks need to park with it.

Unfortunately, ICICI's public sector counterparts, who dominate 70 per cent of the lending business, don't enjoy this luxury much as they would like to. This, since a good number of them don't have much room to dilute equity and yet remain within the government fold. Take the case of SBI, the country's largest bank, in which RBI's holding (which will shortly be transferred to the government) is close to 59 per cent. In fact, in the medium term, this predicament could well have disastrous consequences-PSBs will turn risk-averse and settle largely for zero risk government securities, because there is no incentive to widen the net and develop a large portfolio of small ticket risk-laden loans, which need to be provisioned for.

Tale Bearer
 
TATA'S 'Power''

Exercising brand power to beat down the lender's rate is gaining strength in India. Recently, Tata Power, which is in the process of financing its 4,000 MW, Rs 16,000-crore Mundhra project, turned away Indian lenders since they were not willing to reduce the interest rate on the loan, based on the Tata brand and its creditworthiness. The business loss was not ordinary, since the loan component is a staggering Rs 10,000 crore.

Advisor Speak

Anil Ambani never shies away from offering advice. Last week, after making an elaborate presentation to Power Secretary A. Razdan, which advised him and the power ministry against supporting the gas price put forth by his elder brother for the power sector, Ambani Jr walked up to NTPC Chairman T. Sankaralingam and advised him on the latter's proposed public issue. The NTPC chief's main reason for the float was that the NTPC stock had gotten illiquid in the retail segment.

His advice: woo the existing lot of retail shareholders by offering them a discount in the new issue. Having offered his advice gratis, he quipped, "you don't need to hire a banker for this."

So, why not privatise public sector banks? Unfortunately, the government's allies, the Left parties, are not willing to blink for ideological reasons, and so have forced the government to consider less effective options-merging banks that have more equity headroom than those with less (Canara Bank and Dena Bank, for instance) or lure the market with non-voting shares that offer more dividend than those offering voting rights. While both these methods have not been tested, the third, of allowing banks to access Tier ii capital (bond market), has its limitations.

There is, however, one other option that offers the best deal for PSB-government infuses capital to enable it to keep accessing the equity market. Surely, the Left parties will not object since it will provide the PSBs a level playing footing vis-a-vis the private sector banks. But, for this to happen, it will have to go easy on its other demand-government funding in social sectors, for the exchequer's kitty is limited. The Prime Minister should offer them a choice.

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