Crisis-weary India Inc is all for cheaper money from banks

High interest rates are hurting Corporate India more than ever before. So, when the corporate hotshots mingled with top bankers in Mumbai, what was uppermost on their minds was a case for policy revisit and banks toning down the cost of money.

At an interaction organised by the industry group FICCI and the Indian Banking Association, YM Deosthalee from Larsen & Toubro and Subba Rao from GMR highlighted issues related to the infrastructure sector. Hindustan Unilever CFO Sridhar Ramamurthy wanted banks to encourage consumption by expanding the scope of their lending while K Subramanya, CEO, Tata BP Solar, spoke on making solar energy popular.

Challenges remain:

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1. Interest rates: Indian economy is evidently witnessing slowdown in investment due to rising interest rates though policy rates cannot be the only reason for the same. But investment, which forms 35 percent of GDP and was pacing up at 15 percent, is now growing only by 7-8 percent.Y M Deosthalee, CFO, Larsen and Toubro, passionately argued how higher interest rates could thwart growth and development.

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Sectors like power face structural issues like fuel linkages which also need to be sorted out to bring the economy back to the desired growth path. A Subba Rao, Pesident and Group CFO, GMR, added that the main problem is even the regulators cannot say for how long this pain will continue. So, project bids assuming a certain interest rate and therefore, a certain rate of return have gone haywire.

“This rising of policy rates can only give a first aid for inflation and not cure it while government is also contributing to the inflation through schemes like NREGA,” Rao said. The bankers, on the other hand, expressed helplessness on their part. Their contention is they are merely passing on their own rising costs due to the RBI mandate. The increasing rates at which they were now lending to corporate houses are in no way augmenting their profits, they argued.

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2. Solution to tackle interest rates: It was rightly pointed out by Archana Bhargava, executive director, Canara Bank, that the large corporates could not complain much as they are still mostly lent at the base rates, which were the cheapest rates banks could possibly lend at. But the main concern lay with smaller companies of new businesses which are put off due to higher rates.

Santosh Nayar, deputy managing director of the State Bank of India, said, “The solution for infrastructure players lies in ending the era of aggressive bidding for projects.” He said: “Firms should not take too much risk anymore when they are bidding for projects. The structural issues had to be addressed by raising tariffs as people will be willing to pay if they get quality service in return.”

ICICI executive head of wholesale banking, Zarin Daruwala chipped in, saying interest rates have gone up 3.25 percent in the last few months. If an infra project is financed 80 percent by debt and 20 percent by equity, this rise in rates would mean a drop of more than 13 percent for its rate of return on the project. Firms could be borrowing more in dollar terms against full hedging as it would be much cheaper than rupee borrowing.

But Deosthalee felt that it was easier said than done. The huge money needed in such projects made it impossible to be fully funded by external commercial borrowing (ECB), which again meant moderating interest rates would be crucial for such projects to be executed as planned.

3. Solar Power: K Subramanya, CEO, Tata BP Solar, had a 4-point agenda to make solar power more popular and workable in India. First, appetite of bankers would have to go up to fund these projects. Second, solar power loans had to be separated from other power sector loans. Since banks had to follow a cap to the amount they could lend to each sector, lending for thermal power often put a cap on the amount that could be lent for solar power. Third, priority sector lending status could be given to this sector to incentivise the banks to disburse more funds to it. Fourth, banks would have to play a greater role in signing of power purchase agreements so that these agreements are bankable.

A green policy for banks was a suggestion in the right direction. But as Nayar pointed out, the projects would have to be feasible and bankable in the first place for the banks to lend. Though solar power could not be removed from the power sector category, looking at it as a priority sector was probably more acceptable to be pushed with the RBI.

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4. Rural economy and retail banking: Hindustan Unilever CFO Sridhar Ramamurthy spoke of the consumption story in India which would grow more impressively in rural parts than in urban India. For the story to grow, he said banks would need to give more broad-based services than just savings accounts to the rural customer.

Even S S Mundra, executive director, Union Bank of India, emphasised that global bankers had two-thirds of their loan book for corporates two decades ago, which now belongs to retail. So, retail banking with emphasis on rural India would have to be the focus for all banks. But Zarin Daruwala had a different take on the issue. He was clear that a good credit bureau was needed to expand the scope of rural credit so that banks would also differentiate the more credit worthy from the lesser ones.

The need for more focus on retail banking would involve more innovation. But Deosthalee said: “The word innovation in the case of banking had to be put in perspective as too many new products could lead to trouble that we have seen in 2008-09.”

Innovation would mean more simplicity added to products. Uday Phadke, President, finance, legal and financial services sector, Mahindra and Mahindra, said it had 550 branches in rural areas and most of the transactions were made in cash. Handling of such huge cash volumes in rural areas would also need simple products so that use of cash could be lessened. For infra sector, he suggested that maybe banks could borrow from insurance companies or provident funds with fixed interest rates and in turn lend this money to infrastructure companies, so that they could be assured of fixed interest rates over a longer period of time.

5. NBFCs and financial inclusion: The panel spoke about the need of coexistence of banks with non-banking financial companies (NBFC). The regulator would need to do away with the inhibition about NBFCs. Deosthalee also made a point that if there were regulatory issues, they needed to be discussed and debated. A sudden overnight announcement like excluding NBFCs from priority sector lending tags harms the business and can do no good, he added. Neeraj Swaroop, regional chief executive, Standard Chartered, bank spoke at length on the relevance of banking system for financial inclusion.

There was a missing link though. The members felt that the panel didn’t have the presence of the regulatory body. The members suggested formation of a panel including members from the RBI and the government that could meet on a regular basis to discuss crucial issues and find solutions to economic roadblocks.