Not just bankers, but advisors too

Banks see themselves in the role of advisors to their mid-corporate customer and believe this role is key to growing business in this segment. Practically everyone of the eclectic panel that discussed the ‘mid-corporate opportunity' at Bancon 2011, stressed on the advisory role.

The large corporate borrowers have sufficient in-house resources but the mid-corporate borrowers, most of which are typically entrepreneur-driven, and the medium-sized businesses, need advice, and who better to provide that than banks which have an interest in the well being of these borrowers?

Several examples were thrown up by the panellists. Mr R Venkatachalam, Deputy Managing Director, State Bank of India, described how in the few years before 2005, SBI told its textile industry borrowers that their business would be impacted by dismantling of the ‘multi-fibre agreement' that guaranteed a market for Indian textiles and suggested that they modernise. As a result, textile units in clusters like Tiruppur and Ludhiana withstood the post-MFA competition. Likewise, when electricity became a problem in Tamil Nadu, SBI catalysed the units putting up wind mills in the State. The bank also advised the units to get into niches such as women's and babies' garments to face competition from the Chinese, who were experts in mass production.

Also while stressing on the ‘advisory' role, Mr Vijay Hede, Managing Director of Pyramid Finance Ltd, a NBFC that belongs to the Goa-based Salgaonkar group, mentioned how the company took an equity position in a borrower unit, changed its business model and turned it around. The borrower was a manufacturer of components for city-gas distribution, but the business did not take off because city gas distribution itself did not take off then. But Pyramid got the company diversify into making component for water distribution, and the business survived.

Mr T.T. Ram Mohan, Professor, IIM-Ahmedabad, noted that disintermediation — or borrowers by-passing banks and getting their resources directly from the market — had not happened in India as yet, but it would in times to come, given the impetus to the bond markets. Big companies will borrow directly from the markets and in such a situation, banks would be forced to look at opportunities in the mid-corporate segment. The key factor in scaling up the mid-corporate business is “domain knowledge”, Mr Mohan said. Banks would need to know their customers' businesses well and should also be able to measure the profitability of the businesses, he said. (This, incidentally, ties-up well with what Dr Subir Gokarn, Deputy Governor, RBI, said at the conference — that banks should not only know-your-customer, but should know customers' businesses to grow-with-your-customers.)

Also stressing on the advisory role of the bank, Mr Rajat Madhok, Managing Director and Head-Commercial Banking, Citibank, said that often he found that his bank's mid-corporate clients would bounce-off ideas with the banker and ask “what do you think about it?” He too emphasised the need to have enough expertise to measure the profitability of customers' business.

Adding a comment here, the panel chair, Mr R.M. Malla, Chairman and Managing Director, IDBI Bank, noted that “profit is the least imperfect measure of efficiency.”

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