Breaking into a consortium to lend to a good company in India is not just tough because of a surfeit of banks, but also time-consuming, Rajat Verma, head – commercial banking, HSBC India, tells Shritama Bose. Excerpts:
The last two years have been challenging for SMEs and some banks have experienced serious repayment pressure. What has your experience been?
Given our limited reach, we cannot touch the entire spectrum of SMEs across the country. We work with a small segment of the SME universe in the country. This gives us an opportunity to carefully observe the larger developments in this segment as well as learn from the mistakes of others. When we talk of default rates in the SME segment, we need to understand that they vary across different categories of banks. Some banks may have default rate as high as 15% in this segment while some others, including retail non-banking financial companies (NBFCs), may have it at 1-2%. We believe that there are significant opportunities in this segment. However, there is a role that your credit judgement and processes play in how profitable your portfolio can be in this segment. We are hoping that our carefully calibrated strategy and discerning credit judgement helps us to enhance and build out our presence in this segment.
How easy or difficult is it for a bank like yours to break into the good consortium while lending to corporates?
Companies that are very liquid often say ‘Yes, we have a consortium, but we are never able to give them any business. We just don’t use their credit lines’ and so on. Typically, there, we find it quite difficult as would any new bank because these companies can be over-served. By and large, you have a problem of plenty as most of the good companies in India are well served by banks. There, obviously, we have a more elongated period of entering the consortium, which we’re comfortable with because the company itself is strong. So, we can live with not being part of the consortium for a while. But, that is not our model. Our model is to be not subordinated. Our model is to be pari-passu with other lenders over a period of time. So we would want to get into the consortium in the normal course of things. I don’t see any resistance on this front. The only resistance I find is when they don’t need new banks. They have an ad-hoc requirement for six months. They say, ‘Okay, join the consortium, do this for me’ and after that there’s nothing, etc. Then we find a challenge. Everywhere else, I don’t see any challenge from the companies. I think the process of getting into a consortium and sharing pari-passu letters with other banks is too slow. If the company wants it, it should be an overnight process, but it takes months and I don’t know why. I think that process should be more efficient.
A lot of Indian banks, even private banks, have large CASA portfolios and are obviously in a better position to price loans. It might not be as easy for you, right? Do you have to undercut a lot?
Our cost is competitive with some of the Indian private banks. In fact, it would be cheaper than some others among them. Like many of the strong private sector banks, we are fairly liquid with a substantial current and savings account (CASA) base. This is particularly aided by our strength in transaction banking leading to a higher share of current accounts on account of our corporate client base. However, we do have governance systems on how to price an asset. It has to meet certain internal norms, basis the credit rating of that company. So, the degree of freedom we may have to undercut will be overlaid by our pricing discipline.
Last year, your non-priority NBFC book grew 29.5% and the priority book grew 51%. Do you see these growth rates being sustained this year?
No, but again, we feel quite confident about some of the NBFCs that we work with and we work with them not just on lending, but on other products as well. One of the things that NBFCs need is diversification of funding. We need to take them overseas and find a different set of investors. Microfinance companies are good for us for priority-sector lending (PSL), but for three or four of them, we have also worked on their disbursement solutions. At some point, when these companies reach a certain scale and size, if they continue growing at 50% over the next few years, then they will need different pools of capital. Hopefully, we’ll be able to play a part in that.