So far so good

The Financial Stability Report (FSR) released by the Reserve Bank of India (RBI) is mostly reassuring. It confirms what the Committee on Financial Sector Assessment, headed by then-deputy governor Rakesh Mohan, had concluded almost exactly a year ago. The Indian banking sector is largely healthy. Banks are well-capitalised as far as regulatory capital adequacy ratios go and stress tests for credit and market risk show they can withstand ‘unexpected levels of stress. The problem, as the financial crisis showed, is that in the financial sector, it is hard to quantify the ‘unexpected’ , and when things begin to unravel, it doesn’t take long for even the big boys to go under; Lehman Bros being the classic example. So, while it is good to know that even if all the restructured loans were to turn non-performing, there would be no risk to the system and banks would continue to be well-capitalised , it would be naïve to ignore the reality that in the Indian context, a great deal of this robustness has to do with perceived confidence that comes from public ownership of close to 70% of the banking sector. Thus, even when Indian Bank’s capital was entirely eroded, there was no run on its deposits; in contrast to the bout of public anxiety over ICICI Bank, though its financial position was not endangered. Hence, as private sector players become larger, the RBI will need to be extra vigilant.
For the rest, the areas that need special attention include the potential asset-liability mismatch inherent in banks getting into infrastructure finance in a big way. As the report points out, a significant part of recent credit growth has been in infrastructure and commercial real estate, both requiring longer-term funding. However, bank deposits are essentially short term and, more important, are repayable on demand. Another area of concern is over-reliance on bulk deposits of the here-today-gone-tomorrow variety. Post the crisis, central counter-parties (exchanges) are being hailed as the answer to risks posed by trading in derivatives. However, as with securitisation, once seen as a win-win answer to risk mitigation, it would be unwise to see central counter-parties as fail-safe . They need to be regulated and monitored no less than banks and other financial sector players, as also rating agencies.

ICICI Bank aims at 15% growth

After having raised its ratio of low-cost deposits and pared unsecured loans, ICICI Bank plans to grow its balance sheet size by 15% in 2010-11, improving upon this year’s flat growth.
The bank would continue to grow its retail loans portfolio, project finance and working capital loans but would see the share of unsecured loans shrink, CEO & MD Chanda Kochhar said at the Idea Exchange programme of The Indian Express on Monday.
“The focus this year has been to change the composition of deposits and assets. We would probably end up with a flat balance sheet, but within that one could see a substantial change in the mix, with CASA (current account savings account) deposits going up and wholesale deposits coming down. Similarly, on the assets side, the secured loans might go up and the proportion of unsecured Personal loan and credit cards could come down,” Kochhar said. The bank’s CASA ratio has improved from 28% in 2008-09 to 38% now, she said.
She said the bank’s asset base will increase in 2010-11, with the pick-up in investments and credit demand in the second half of the next fiscal. “My estimate is that in these businesses (home, car loans and project and working capital finance) that we want to grow, we will be able to achieve 20-22% growth. Because some parts (unsecured loans and credit card) of our balance sheet will come down, net-net we may grow at 15% in the coming year,” Kochhar said. This would expectedly help ICICI Bank improve the market share it has been losing to rival banks.
While State Bank of India’s market share of assets rose from 15.9% in 2007-08 to 18.4% in 2008-9, ICICI Bank’s share fell from 9.7% to 7.2% during the years. HDFC Bank raised its market share from 2.6% to 3.1% in the same period. ICICI Banks’ asset base declined to Rs 3.8 lakh crore in 2008-09 from Rs 4 lakh crore in 2007-08. In the first quarters of the current fiscal, the asset base went further down to Rs 3.56 lakh crore.
She also expected investment to become the next driver of economic growth, supplementing the consumption-led growth seen in the past.
“The peculiar thing about India is that investments are being driven by underlying demand. Unlike other countries which have to force investment today, I think our investments are just fundamentally driven by demand and that is why they are much more productive.”
She said corporates are gearing up to invest and there is an up-tick in loan approvals. When asked what reform measures are needed to boost investment, she said procedural changes in areas like land acquisition, model concession agreements, termination clauses and dispute resolution would be of tremendous help. “That is more important for us to kick start investments. I don’t see big-bang reforms are required,” she added.
On the new banking licences proposed by the government, she said, “I think competition is always good for the customer. But what one has to see is the prudence and regulations in giving licences to new players. I am sure the RBI will take all that into account and come up with the detailed guidelines.”...

ICICI Bank cuts down unsecured loan offtake

The country’s largest private sector bank ICICI Bank said that it is pruning its portfolio of unsecured retail loans, including personal loans, small-ticket loans and credit cards.
“As far as credit growth is concerned, for the past three quarters, ICICI bank constantly letting unsecured retail portfolio to go down. ICICI are growing corporate finance book both on project finance and trade finance. ICICI bank are growing 20 per cent in the auto and housing sectors. It’s the other products such as personal loans, small-ticket loans and credit cards, which are coming down,” Chanda Kochhar, managing director and chief executive officer of ICICI Bank, said
Kochhar said there has been a pickup in credit during recent times. “A lot of investment activities have started to take place. Lots of projects have seen financial closure. They have started initial investment. Demand for credit will pick up in a big way in the next financial year. Deposits are picking up substantially, if you see quarter-on-quarter our CASA (current account savings account) deposits have show reasonable growth, both in terms of absolute volumes and in value,” she added.
In the recent past, the Indian banking system has witnessed a very low credit growth. As the economy recovers and investment activities coming back to normalcy, credit offtake is also like to witness gradual growth.
K V Kamath, chairman, ICICI Bank, concurred with Kochhar and said that RBI’s move will not impact interest rates during the coming nine months. “For the first nine months, I don’t think there is a real pressure on interest rates. There is still enough liquidity in the system. I think liquidity needs to come down to push up interest rates,” Kamath said.
Kochhar said there would not be any immediate impact on interest rates if the cash reserve ratio (CRR) is hiked by the Reserve Bank of India (RBI). "Interest rates are driven not just by policy announcements, but more by demand and supply of credit and liquidity,” she said.