How banks dress books to meet loan, deposit growth targets

Saikat Das
moneycontrol.com

The loan growth numbers for most banks in FY13, despite being lower than their initial targets, would not have been as bad as the market was fearing, given the weakness in the economy. But a decent chunk of that growth could well be 'inorganic' in nature.

Towards the end of a financial year seasoned bank chairpersons are known to use a few tricks of the trade to achieve RBI projected loan and deposit growth in the last seven days before their book closures. Call it window dressing or whatever, this is the traditional practice.

The non-food credit or the amount banks lend to individuals and companies, had risen 14.03% year-on-year to Rs 51.66 lakh crore as on March 22, 2013 missing the 16% goal projected by the Reserve Bank of India in 2012-13.

However, this rose 17% y-o-y as on March 29, 2013, according to RBI data. Similarly, total deposits grew at a faster pace from 14.25% to 17.38% at Rs 69.36 lakh crore during the same time.

The modus operandi: 

A bank chairman just calls up his potential clients to remind them of their sanctioned loan limits, which they are not yet availed of. Loan sanction limits loses validity after a certain period of time. Using his/her special power, he/she offers some relaxation on the prevailing rate of interest (read spread over and above base rate).

After availing those short term loans many big companies would route those money through their subsidiaries, which in many cases park the same money into the bank's short term deposit schemes ranging from 3 days to two weeks.

"The practice is evident when you will find most of the board meetings happen in last week of the financial year. A chairman is the head of a bank's board also. He gets all those proposals passed by the board to facilitate transactions. There is nothing wrong in it. Ultimately, he is not committing any fraud," said a former CMD of a state-owned bank on condition of anonymity. 

Is it a kind of fraud?

Certainly not! Rather, it is the reality of banking business. According to some senior bankers, the central bank is fully aware of it. However, RBI does not interfere banks' day to day business.

"The central bank is supposed to identify violation of norms. In this case, nothing is violated. RBI will never do something that hurts the general flow of the business. It is not here to pull up stings deliberately," quipped a senior banking analyst from large domestic brokerage.

The play of interest margin

There is no fear of margin loss. For example, a bank really cannot disburse a loan to any AAA rated company below its base rate. It only allows a reduction in spread, which is added over and above the base rate. Currently, the lowest base rate is 9.60% offered by HDFC Bank . So a discounted rate may come around 10 percent. However, bulk deposit rates will be around 8-9% range.

"This is a win-win situation for both banks and borrowers," a former chairman and managing director of a large public sector bank told moneycontrol.com.

"A company gets a dream rate while a bank achieves huge business volume at the cost of a little margin sacrifice. Even after considering CRR and SLR obligations, a lender continues to earn decent interest margin. A corporate honcho is always happy to do this as the practice ensures good relation with a bank" he said.

Cash Reserve Ratio or CRR is the portion of deposits that banks need to keep with the RBI at 4%. Statutory Liquidity Ratio or SLR is the portion of deposits that banks are mandated to keep in government securities. Currently, it stands at 23%.

The corporate angle…

It is undeniable that companies too are supposed to meet some year-end sales target. This leads to some working capital demand. Moreover, companies also buy assets to get the tax benefits on account of depreciation for the full year. For example, a company may buy vehicles at the year-end and thereby, avail the depreciation benefits.

"Like banks, corporates need to shore up sales by the year-end. This is a seasonal phenomenon. I am not sure whether it happens globally," said a senior official from a rating agency.

saikat.das@network18online.com