The Hindu Business Line : Banks on a re-think

DATA ON SOURCES of corporate financing published in this paper last Sunday represent the flip side of the Reserve Bank of India's observations on commercial lending by banks. According to the latest RBI Report on Trends in Banking, 60 per cent of the commercial credit went to large borrowers at sub-PLR (prime lending rate). There was a general recognition that market conditions were forcing banks to lend to large borrowers at sub-optimal rates; banks were competing for market share with alternative sources of funds available to Indian companies, especially "high quality firms."

The data published last Sunday bear out the fact of competition, underlining both the deepening of financial markets and the need for banks to rethink lending strategies. Between April and October, Indian companies raised Rs 51, 459 crore from the equity market; on the other hand all through fiscal 2005 banks disbursed Rs 42,976 crore to medium and large units. With the buoyancy in the capital market and the rising number of new public offerings, the share of equity as the funding route for companies is bound to grow. The converse trend of lower levels of debt is already evident; according to the same RBI report, a fourth of companies that are part of the BSE 200 list have borrowed less than Rs 50 crore.

The rising popularity of the capital market among Indian companies is part of a trend that began in the 1990s, peaking in 1994, and then tapering off in the second half as investors lost confidence in the market, the economy slowed down and the disclosure norms were tightened. Over the last two years the primary market has witnessed a surge in companies seeking to raise funds. According to RBI data, the pace of growth has been searing with the total resources mobilised from the market — through prospectus and rights issues and private placements — rising from Rs 71,752 crore in 2003-04 to Rs 1,05,944 crore in 2004-05. The share of financial intermediaries, as the RBI admits, has fallen markedly but this has been the consequence of more than just the rush to the capital market. Companies have, over the last decade or so, de-leveraged their balance-sheets. Between the decades ending 1992-93 and 2003-04, public limited companies increased their share of internal accruals from 32.5 per cent to 44.5 per cent. The debt-equity ratio between the two periods fell markedbly, from 90.7 per cent to 65.2 per cent, mirroring, in effect, the growth of the corporate sector's capacity to withstand financial shocks.

For their part, banks may not be thrilled by this news of reduced corporate vulnerability because it comes precisely through a process of their displacement as a major source of funds. That explains the sectoral shifts in credit disbursement with retail lending occupying the pride of place in the banks' lending agenda. With a 42 per cent growth in 2004-05, the retail sector has come as godsend. Small and Medium Enterprises are another; the capital market's recent boom has much to do with the success of mid-cap companies in trading, IT and exports. For banks, all is not lost; risk-adjusted returns are yet possible. And, if the infrastructure opens up, with the Prime Minster's new project, banks will have some more places to park their funds in.

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