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Time to take a hard look at multiple banking

Time to take a hard look at multiple banking
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First Published: Mon, Jan 19 2009. 12 30 AM IST

Updated: Mon, Jan 19 2009. 09 41 AM IST
Shares of State Bank of India, the country’s largest lender, lost close to 9% in intra-day trading last Monday after chairman O.P. Bhatt told reporters that the bank had lent money to Hyderabad-based Maytas Infra Ltd, the infrastructure firm promoted by family members of Satyam Computer Services Ltd founder B. Ramalinga Raju.
The account has not turned bad yet, but investors suspect that it may end up as a sticky asset, forcing the bank to set aside money to cover it. Such provisions depress banks’ profits.
State Bank’s exposure to Maytas Infra is around Rs475 crore, including fund-based and non-fund-based facilities. Its limit to Maytas Infra, or the maximum exposure that it could have taken to the firm, is around Rs830 crore.
Overall, the Indian banking system has an exposure of around Rs3,500 crore to Maytas Infra and it could have been as much as Rs4,700 crore. Out of the Rs3,500 crore, banks have lent about Rs1,500 crore and the rest of their exposure is in the form of guarantees and letters of credit.
Banks are typically happy to offer guarantees to construction firms because they earn fee income equivalent to around 1% of the funds for which they stand guarantee. A construction firm needs to offer a bid-bond guarantee when it makes a bid for any project.
Once it gets a project, it needs to offer advance payment guarantee, performance guarantee, etc., at various stages, and even after the project is completed, a certain portion of the cost—typically 5%—is not handed over to the construction firm immediately. Known as retention money, this is given after years. At every stage, banks either offer guarantees or cash to the construction firms to keep their business going. Data collated by banks show that public, private and at least two foreign banks feature in the list of Maytas Infra’s bankers.
Among public sector banks, apart from State Bank of India, Punjab National Bank, Allahabad Bank, Bank of India, Bank of Maharashtra, Indian Overseas Bank, Vijaya Bank and State Bank of Hyderabad are exposed to the company. IDBI Bank Ltd, ING Vysya Bank Ltd and almost all new private banks except IndusInd Bank Ltd, and Standard Chartered Bank and Hongkong and Shanghai Banking Corp. Ltd have also advanced money to the company in the form of working capital or term loans to buy machinery and construction equipment. At least two banks have given corporate loans to Maytas Infra—a facility given for no specific purpose. To be sure, none of the accounts has gone bad as yet and only in three cases has the company not paid interest for the quarter ending December 2008.
Participating in various projects worth at least Rs40,000 crore, Maytas Infra desperately needs funds from banks, but none of the lenders is ready to throw it a lifeline. This is because they are not sure whether the money already lent to the company is safe after Raju’s confession to a Rs7,163 crore accounting fraud at Satyam Computer Services.
In mid-December, the board of Satyam approved a proposals to acquire Maytas Infra and Maytas Properties Pvt. Ltd, but the next day the decision was reversed after investors hammered the Satyam stock. In his 7 January confession, Raju referred to non-existent cash and bank balance of Rs5,040 crore, non-existent interest income of Rs376 crore and an understated liability of Rs1,230 crore, and added that the “aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones”.
Bankers have lost trust in Maytas Infra. They are not ready to offer new loans and guarantees even though that will ensure that the company is able to meet its commitments to various ongoing projects and repay bank loans.
At least one senior banker, who didn’t want to be named, told me this could have been avoided had the banks known how much exposure the entire system had to Maytas Infra before the Satyam scandal surfaced.
The bankers did not know that because they had lent to the company individually and not under a consortium.
Under consortium financing, banks and financial institutions fund a single borrower with a common appraisal and documentation, collective supervision and follow-up exercises, but in multiple banking, different banks meet fund and non-fund requirements of a single borrower without a common arrangement among the lenders.
The problem in such cases is that every bank takes an isolated view and no lender has a clear idea about a borrower’s overall exposure to the system and ability to repay loans and offer collateral to lenders in terms of fixed assets such as plant and machinery and current assets in the form of inventories, raw materials, etc. When a firm shops for a banking facility, it gets loans at a cheaper interest rate and fund diversion is not an uncommon practice, particularly for corporate loans.
In December, the Reserve Bank of India fine-tuned the formats for declaration of information by a firm at the time of applying for a credit facility to a bank. It also changed the format for exchange of information among lenders for those firms that have multiple banking relationships.
The new formats have been designed to look for information on derivative transactions and unhedged foreign currency exposures of the borrowers. The regulator needs to take a closer look at the system of multiple banking to ensure lenders’ safety and prevent misuse of funds by firms.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai bureau chief of Mint. Please email comments to bankerstrust@livemint.com
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First Published: Mon, Jan 19 2009. 12 30 AM IST