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SBI Caps’ ownership rejig plan could trouble PSBs

The country’s largest lender SBI wants to revamp the ownership structure of its money-spinning subsidiary SBI Caps, but the proposal has put Public Sector Banks (PSBs) in a spot. 

Published: 22nd April 2018 08:22 AM  |   Last Updated: 22nd April 2018 08:22 AM   |  A+A-

Commuters walk past a bank sign along a road in New Delhi, November 25, 2015. | Reuters

MUMBAI: The country’s largest lender SBI wants to revamp the ownership structure of its money-spinning subsidiary SBI Caps, but the proposal has put Public Sector Banks (PSBs) in a spot. The move throws light on the larger issue if state-run banks failed to comply with prudential lending norms not conducting their own independent reviews before lending or whether they solely relied on SBI Caps’ appraisal, which could have been commissioned either by SBI or the borrower.

“Public sector banks don’t have the technical expertise and hence rely largely on the appraisal done by SBI Caps, particularly when they are part of consortium lending. These reviews could have been commissioned by SBI or the borrower. Since SBI Caps was part of SBI, banks rely on it instead of conducting a similar review on their own,” a senior banker told The Sunday Standard. Typically, banks form consortia, where multiple lenders pool resources to meet the funding needs of mid-size and large accounts (above Rs 2,000 crore). 

In some cases, the consortium comprises as many as 20 lenders. During the high-growth years (2009-2013), banks were on a lending spree, largely to infrastructure firms including steel, cement and power. 
It’s this reckless lending that has snowballed into a `10-lakh crore toxic pile, which the government and the RBI are now trying to clean up.   Even if banks are part of the joint lending, norms dictate that they conduct independent reviews to determine their respective risk-appetite, if the credit discipline of the borrower meets their internal credit culture and if the borrower’s business proposal appears feasible.  

“RBI norms are very clear that all banks must engage merchant bankers to do independent reviews before lending,” Rajnish Kumar, Chairman, SBI had told TNIE last week. He added that though SBI’s investment banking arm was a professionally run entity, banks should have conducted their own due diligence before disbursing funds. He, however, declined comment if PSBs were flouting the norms, not conducting their own due diligence. SBI Caps is the market leader and has offered project financing services to over 50 per cent of all loans that Indian banks have so far disbursed. Other players include the merchant banking businesses of ICICI, IDBI, Axis and Yes Bank. 

The dominant position of SBI Caps becomes evident from the fact that the government had roped it in to chart out the course of action for the mammoth `2.11 lakh crore bank recapitalisation plan, which some bankers have raised objection to. “Engaging an entity, which is partly responsible for the bad loan crisis, to rollout a survival package is self-defeating,” said a senior banker. 

Now, with SBI considering toning down the ownership structure of its investment banking arm, the problem for PSBs appear two-fold. One, divesting a part of the equity stake to foreign investors, another proposal SBI is weighing, could expose the books of accounts to foreign entities, which state-run banks are uncomfortable with. 

Two, if SBI absorbs the loan syndication business of SBI Caps, it could lead to a conflict of interest, which RBI has reportedly objected to. Also, the investment arm is engaged in various debt restructuring proposals, including those where it also conducted due diligence, which could be in violation of norms. Some bank chiefs have even raised concerns about the quality of service rendered by SBI Caps. 

Banks have also woken up and are opposing decisions that SBI Caps has put its approval stamp on.   
According to sources, banks are awaiting to see if SBI’s proposal will pass through the regulatory lens. Alternately, lenders are also considering making representations through the Indian Banking Association. 

Ranking matters

SBI Caps is the wholly-owned subsidiary that advises banks, financial institutions whether and how much they should lend to a given corporate and how to restructure debt in case of a default, besides other services

It was ranked first across Asia Pacific and Japan (mandated lead arranger for corporate loans) in 2016, as per the Thomson Reuters League Tables

It was also ranked fourth in the Global Project Finance rankings with a global market share of about 4 per cent

In FY17, as per SBI Caps’ annual report, debts were written off in 654 cases it had advised, including 402 where amount due was declared not recoverable, while over 71 cases were written off due to liquidity crisis by the borrower

SBI Caps’ project finance division is the lucrative business units and had raked in a plum J383 crore in gross fee income, or nearly 90 per cent of its total income last fiscal
 



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