$5 billion of advances the bank made to Indian borrowers have been internally classified as at risk of defaulting
Mumbai: When India’s billionaire Ruia brothers went looking for loans to expand their steel-to-power empire around the turn of the decade, Standard Chartered Plc. stepped up.
Some five years later, the $2.5 billion Standard Chartered lent to the Ruias’ Essar conglomerate is among debts the London- based bank isn’t certain it’ll recover, according to people with knowledge of the matter. About $5 billion of advances Standard Chartered made to Indian borrowers have been internally classified as at risk of defaulting, in addition to the $1 billion of onshore loans that have already become non-performing in India, the people said.
India, Standard Chartered’s biggest profit contributor as recently as 2010, has become a major headache for chief executive officer Bill Winters, who took over from Peter Sands in June. As emerging-market loan losses accelerate, he’s raising money, cutting about 15,000 jobs globally and exiting or restructuring about $100 billion of assets. Standard Chartered has reduced exposure to India by about a fifth.
“There are good opportunities there, but equally one needs to be very, very selective," Winters, 54, said on a 3 November conference call after the bank announced a surprise third- quarter loss.
Standard Chartered’s woes in India are partly the result of an expansion there that failed to fully factor in the risk of lending to companies like Essar, according to current and former employees who spoke on condition of anonymity.
Essar Global experienced delays in its investment projects that were “beyond the control of the company" and expects they will begin to show results it can use to repay debt within six to nine months, the company said in an e-mailed response to questions.
Standard Chartered has been in India since 1858, but it was after the 2008 global financial crisis that the country became a main growth engine. The London-based lender was less affected by the turmoil than competitors like Citigroup Inc. and Morgan Stanley. In November 2008, it bolstered financial buffers by raising $2.7 billion from investors including Singapore’s state investment company, Temasek Holdings Pte.
A key part of the push into emerging economies under Sands was the now-defunct Strategic Client Coverage Group, set up in 2008 to target some of the top corporations Standard Chartered wanted to do business with across markets from Asia to Africa and the Middle East. The initiative was championed by the bank’s deputy CEO, Mike Rees, according to the people familiar with the matter. Standard Chartered recruited bankers to the Singapore-based group and appointed Rahul Goswami, the head of corporate advisory, to run it.
Standard Chartered declined to comment on the group, known by the acronym SCCG, or on details of the bank’s loans in India. It declined to make Rees available for comment. Goswami, who left the bank last year, declined to comment.
Many banks have special groups to deal with large and important clients, but Standard Chartered’s version was unusual in several respects, according to the people familiar with its operations. Rather than trying to win business by first offering nuts- and-bolts banking like cash management, trade financing and foreign exchange, the group adopted a strategy of lending directly to the owners of large Indian conglomerates, rather than to their operating companies, the people said. It established ties with about 17 of India’s biggest business groups, most of which are family-owned. The aim was to then use those connections to sell more services to companies within the groups, according to the people.
The problem with the lending-first approach was that Standard Chartered lacked the deeper relationships that might have provided early warning signs that some borrowers were getting stressed, three of the people said. Standard Chartered also kept an unusually large share of the risk by not syndicating the loans to the same extent as other banks did, according to the people. One reason for this was that efforts to sell part of the debts to Indian banks met with tepid demand because they’d already lent to the same borrowers, one person said.
The focus on India yielded initial dividends. Pretax profit there surged to $1.2 billion in 2010—the bulk of it from wholesale banking—from $690 million in 2007, making it the bank’s most lucrative market.
From there, Standard Chartered’s fortunes in India started turning as delinquent debts edged higher. In the first half of 2015, the bank posted $276 million pretax loss in India as it booked $483 million of loan writedowns—almost triple the total for last year. It recorded $315 million of loan impairments in India in the third quarter, or a quarter of the global total.
While India’s broader banking industry has been afflicted by rising defaults, Standard Chartered stands out. At 8.9%, it had the second-highest bad-loan ratio among the 50 largest lenders in India as of March 31, five times that of HSBC Holdings Plc. and seven times Citigroup Inc.’s, the latest filings to the central bank based on local loan books show. The bank’s loan losses in Asia are partly a result of “weaker underwriting standards in certain countries," Citigroup analysts wrote in a 6 November research note. They didn’t specify which markets. Standard Chartered had $20 billion of India loans outstanding as of 30 June.
The lender said on Tuesday that it hired Zarin Daruwala, ICICI Bank Ltd’s head of corporate banking, to run its operations in India. She will replace Sunil Kaushal, who vacated the role to become the regional chief executive for Africa and Middle East starting 1 October.
One major borrower the clients unit landed was Essar, the conglomerate controlled by Shashi and Ravi Ruia. About $2.5 billion of loans to the Indian tycoons’ holding company Essar Global, made through the SCCG in 2010, have been put on an internal watch list for credits at risk of souring, according to the people. It wasn’t clear whether Standard Chartered has made any provisions for those debts.
Essar companies used the loans to help finance an $18 billion spree of investments aimed at boosting capacity at steel plants, oil refineries and ports. Earnings at group companies have been hurt by a drop in commodity prices and weak demand.
Standard Chartered has approached Russia’s VTB Group about unloading part of the loans, people familiar with the matter said this month. A representative for VTB declined to comment. The relationship between Goswami’s unit and local corporate bankers was a sometimes tense one, according to two of the people. While the clients group was formally required to run lending decisions by local risk officers, senior bankers in India were sometimes left out of the deliberations, these people said.
Winters now has to untangle the bad-loan mess in India even as he retains Sands’s focus on emerging markets. It may take time: 65% of Standard Chartered’s exposure in the country is to borrowers rated below investment grade, according to the bank. Bloomberg
Darren Boey in Hong Kong contributed to this story.
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