The Hindu Business Line : Banks keen to take out 'good' FI term loans

IN a bid to increase asset portfolios, public sector banks have begun preparing to take out some of the term loans of the financial institutions (FI).

Banking sources here said, however, that any such takeout would involve "cherry picking." This implied that the bankers would prefer taking out only some of the good quality risk-weighted assets from FIs. Sources said that among the FIs being targeted for such asset takeout included IDBI, which has a large portfolio of term loans.

But sources said that such takeouts would not involve loans that had been subjected to the corporate debt restructuring norms prescribed by the Reserve Bank of India. This was because taking out assets implied that the outstanding loans would be assumed by the banks entirely on a non-recourse basis. Taking out CDR loans was therefore likely to push up the credit risk substantially, the bankers said.

Consequently, the loans being targeted for takeout would mostly be term loans with no default history. Even here, bankers said that they were opting for term loans with a higher residual maturity of at least three years and above. The reason for this preference was in view of the large accretion of term deposits within the banking system. Most of the term deposit accretions fall in the maturity profile of three years and above, they said. These accretions have taken place despite the reduction in the term deposit rates. As a result, bankers said, that they were also in a position to take out loans with a residual maturity of up to five years.

Bankers also said that the pricing of such takeouts would be done on the basis of the present market rates. This would technically imply that the pricing would be done on a yield-to-maturity (YTM) basis after factoring in the risk. Such a pricing was expected to translate into a large profit for the FIs.

This was especially since some of the term loans extended in the last decade was done at rates in excess of 12 per cent. Public sector banks, on the other hand, are comfortable with discounting rates as low as 8 per cent for good quality assets.

Bankers said that even at the low rates, they would be making a considerable spread. This is because most of them presently have a weighted average cost of working funds at as low as 5 per cent, though in the case of some stronger banks, it is even lower. As recoveries of past non-performing assets improve, the weighted average costs would drop further, improving the spreads, they added.

Banks were also resorting to takeouts to improve their returns. Besides, the bankers said that spreads on investments were no longer attractive. This was especially in a regime where the G-sec yields were lower than the weighted average cost of working funds.

Most of the banks already have high capital to risk weighted asset ratios, at least two to three per cent over the prescribed limit of 9 per cent. Fis, on the other hand, are at a disadvantage as far CRAR is concerned. Consequently, bankers said that the takeouts would allow FIs to shed some of their high cost long-term liabilities.

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