The Hindu Business Line : `Banks will need Rs 30,000 cr more as capital' — Mr Balaji Swaminathan, Head-Corporate, ICICI Bank

The biggest issue for a bank is capital. If Corporate India decides to spend Rs 300,000 crore, banks are going to need Rs 30,000-40,000 crore of additional capital.

As the head of the Corporate Banking Group of ICICI Bank, Mr Balaji Swaminathan's major responsibilities include building and maintaining banking and all other relationships with corporate clients, including public sector companies.

In an interview to Business Line, Mr Swaminathan, who also serves on the boards of ICICI One Source, ICICI Infotech, Arvind Mills, Jindal Vijayanagar Steel, Bharat Forge and Haldia Chemicals Ltd., gave insights into the trends in corporate banking, the problems and prospects and what the future has in store.

Excerpts from the interview:

What does the increase in credit offtake mean for bankers?

We have done a detailed analysis. We have talked to top 200 of our clients. We believe that Corporate India's investment in capital expansion will be over Rs 300,000 crore, over the next 12-18 months.

Half of it could come from equity, including internal accruals and FCCBs (foreign currency convertible bonds). Of that, until recently our expectation was that 30-35 per cent would come from domestic sources and 15 per cent from overseas.

When was this internal study done?

We do this study every 3-4 months. The last one was done in October and we are going to start another in March. We go to CEOs and CFOs of every company and ask them what their expansion plans are, which areas, which States, how they will fund it.

There is a lot of activity in infrastructure, mainly power, oil and gas and metals. In oil and gas, I am including pipelines.

We are also seeing substantial investments in power. One big private power project we were looking at was Dadri. The (Reliance Energy) board has said they will do it regardless (of how the problem between Anil and Mukesh Ambani goes). They are saying instead of 2006-07, the project will come up in 2008-09.

The Tatas are also looking at power expansion. The steel industry is saying that it wants to increase production from 35 million tonnes a year now to 100 million tonnes by 2020.

The biggest issue for a bank is capital. If Corporate India decides to spend Rs 300,000 crore, banks are going to need Rs 30,000-40,000 crore of additional capital.

Where is the additional capital going to come from? We again realised this early, so we did the public offer when people were wondering why we were coming out with a public issue when there is no credit offtake in the system.

Some of the Rs 40,000 crore will come from internal accruals. On a rough calculation, the total profits of the banking system for two years will be about Rs 10,000 crore. You still need Rs 30,000 crore.

Added to this is the government's dilution of its stake in banks. Therefore, I expect that the banking system will come with significant capital market operations.

What about ICICI Bank?

We believe that we will not need to go to the market in the next 3-4 years. There is going to be definitely a need for capital. But I am saying that we don't need it from the capital market.

(That is because) if you look at ICICI's investments in some of its subsidiaries — the life insurance company, the general insurance company, the BPO company — these are all highly valuable today.

Some of the capital which we invested is today worth much more. A small dilution should meet our capital requirements... For example, if ICICI Prudential Life Insurance decides to list and we list at 10 per cent of our stock along with it, that will meet our capital expectations.

What you might see is some of our group companies coming to the market.

Which ones?

I think all of them. The life insurance company today is doing well. If you look at global benchmarks, it will be a valuable listing when it happens.

Will they do an overseas listing?

Not necessarily. Given the inadequacy of similar stocks in the domestic market, we might get a premium. For example, there are plenty of listed insurance companies abroad. Here, there is none. There are plenty of listed BPO companies overseas. Here there is one (Mphasis).

How is the recovery situation?

It is better. Our NPAs (non-performing assets) have come down to 2.3 per cent from 4.7 per cent. Three things have helped. First, aggressive provisioning — we have almost 75 per cent cover. Second, the formation of ARCIL has helped the entire banking system.

We used to have a troubled asset, almost a junk asset. In our own assessment we thought the company was worth Rs 50-60 crore. We transferred the assets on that basis. But they are selling them at Rs 140-150 crore.

Typically, how many paise to a rupee will you get from ARCIL?

They have valued our assets from 30 paise to 50 paise. But if I have provided up to 75 per cent, and if I get more than 25 paise...

Could you not have done the recovery yourself ?

No. They are able to consolidate the debt; we can't do that. ARCIL could go to the rest of the players and buy their debt too. If we go to the other players, they will not sell.

Besides, ARCIL has some special recovery rights under law, which we don't — when they send a notice, the ability of borrowers to obtain a stay is restricted, and things like that.

How much of assets have you sold?

I think we may have done about Rs 1,500-2,000 crore.

Could this number have made a significant dent in the NPAs?

No. That is why I said the main reason (for NPA reduction) is provisions. The ARCIL transfer has not economically changed our NPA position...

The third thing that helped reduce NPAs is that many assets have become standard. Steel sector, for example, has become standard.

One hears that you are going to close your recovery cell?

Yes, because there is nothing left to recover.

But what about future NPAs?

If something does happen it will be one-off. The reason for creating a recovery cell was that the "systemic NPAs" need systemic solutions, not transactional solutions.

In our corporate lending the last two years, out default rate is a number I am very proud of — 0.00 per cent. Total default in corporate banking in the last two years is nil — of the assets booked in that period.

The reason for that is we lend only short term. I don't like long term. In short-term loans, default rates are low. If I lend for 90 days, you will also pay back in 90 days. If I give you five years, then you want to defer it. Short term means LC, bank guarantee, etc.

Any default here does not affect the banker, it affects the borrower's trade — it affects his supplier, customer. He won't let that happen. But in long-term loans, the only link is between him and the bank. He is happy to renege on that.

But can you really carry on with only short term? Can you say `no' to long-term loans ?

No, we won't say no. But in that we market, we are moving towards `originate and sell down'. My corporate book, funded, is hardly Rs 4,000-5000 crore. My short-term credit is Rs 40,000 crore.

What is the size of your corporate book as a whole?

The throughput this year will be about Rs 45,000 crore. This year we would have grown it by about 55 per cent over last year. Of this, Rs 5,000 crore is the outstanding book, available for selling down.

Origination market is also driven by size. I'll give an example: I'm in discussion with a large company, which wants Rs 1,500 crore for capital expansion. I've told them I'll take the entire thing.

Then, I will go and sell it to players who will take Rs 40-50 crore. Let us say a small bank in South India goes to the company — incidentally, it is AAA rated — and says, "I want to participate in your debt, I want Rs 30 crore," it won't even look at the bank. But the bank will now participate through us.

What spreads will you get?

Anywhere between 10 and 30 basis points per year. I'll give you an example. We did a shipping deal. The company — I won't name it — wanted Rs 250 crore. The asset came to me at 3 p.m., when my money went out. At 2.45 p.m., we had received the money from the counter parties. It was pre-sold. It was a five-year deal.

I make 30 basis points per year, 150 basis points for five years. Discounted, we got 110, which is about Rs 2.5 crore. My credit risk for that asset was for minus 15 minutes.

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