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29/07/13 12:53 PM
Savers have discovered avenues other bank deposits; borrowers have learnt to game the system and regulators are turning the screws. Banking is not the business it used to be.
July 28, 2013: Anyone watching Indias 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.
http://www.thehindubusinessline.com/opinion/columns/aarati-krishnan/who-wants-to-run-a-bank/article4963721.ece?css=print
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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 Lines 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 dont 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. Indias 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.
Keywords: banking, new banks, new bank licences, savers and borrowers, retail banking, priority sector lending, RBI, interest rates
http://www.thehindubusinessline.com/opinion/columns/aarati-krishnan/who-wants-to-run-a-bank/article4963721.ece?css=print
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Printable version | Jul 29, 2013 12:52:44 PM | http://www.thehindubusinessline.com/opinion/columns/aarati-krishnan/who-wants-to-run-abank/article4963721.ece The Hindu Business Line
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