Last Tuesday when I flipped
my Economic Times my eyes went spiral when I read the news on SBI’s decision to
link its lending rates to the external rating of the Corporates i.e. delinking it
from SBI’s internal ratings. Under the existing system, the applicable rates
could be advised firmly to the borrower only after approval of the proposal by
SBI’s Credit Committee. This was creating hindrance for business at branch/appraisal
level as the officers were not able to firmly advise the applicable interest
rate to the borrower.
Under the new rule, SBI
will advise the Mark-up applicable over its Base Rate for arriving at the
applicable interest rate and this applicable Mark up to a borrower will be
based on his external rating. So suppose two companies which are externally
rated ‘BBB’ and ‘A’, and the applicable Mark
–ups for these ratings are say 3% and 2% respectively, then the applicable rate
for these companies will be 12.80% p.a. and 11.80% p.a. based on the current
SBI Base Rate of 9.80%.
Well, a great decision
and can only be expected from great innovators. But being at the lending side
and having experience of dealing with hundreds of Corporates in Indian
environment, I got worried due to following nightmares if this new system is
universally adopted by all the banks, take a look and enjoy:
(Note: I personally admire
this bold and innovative decision in the field of finance. This will set a new paradigm
in Indian lending scenario. My Hat’s-off. Writing this note just to share the
fun part of our business. Hope you enjoy reading.)
1. Feeling like someone
is making a great effort to produce something, and he is told that selling
price of his product is outsourced to a third party!!
2. Worse: I am sitting
in office, and get a call from client: Hey Kaps, sending my loan application to
you. And, now we are not required to discuss the interest rate since for that banker
is useless now. I will discuss that with my great external rating analyst who is
meeting me on dinner tonight at Taj !!
3. All external rating
agencies have suddenly increased their fee rates (and why they should not??).
4. Corporates expecting
downward risk on their rating are sending bouquets to the external rating
agency team.
5. The rating boys have
overnight become the new blue eyed boys in the town and the poor banker who
will process the entire application, weighting the entire proposal based on the
risk and analysis, taking a lending call (with staff accountability on him for
NPAs) and putting hard cash of the bank at a measured level of risks, is lost
in dark nights.
6. In the small corner
of my heart, I felt a little comfort of relief soothing myself that thank god it
is decided to only outsource the loan pricing but still I am the Prince who
will have a role in deciding the quantum of loan. Right then only, I got a call
from the client telling me: Hey Kaps, I forgot to tell you that in the system
it is felt that branches are not in position to tell the client how much loan
will be sanctioned by the bank, therefore shortly the loan amount will be also
linked to a Project’s/Proposal’s Report weighted by a reputed agencies OR even
to the external rating. So, if I get ‘BBB’ rating for my project/proposal, you
will take 50% exposure in the total loan requirement and rests by other
lenders. But if I get ‘A’, you will take 80% exposure and leave the rests for
other bank. At ‘AA’ or above rating, you will take entire 100% of the loan
proposed.
I asked him: What will
I do then sitting in this office?
Client: Just chill, forward
my project report to credit committee and take care of disbursement and
monitoring. Rests I will manage with my Sweet-Heart Rating Agency!
7. Got a call from my
internal rating analyst : Hey Kaps, my existence is at risk, any job for me!!
8. A recall of thoughts
in my mind about the calls from rating agency guys for sharing information of
the clients being rated by them, as they do not get success in extracting the
critical information from the borrower, since they have no control over borrower
except delaying/suspending the rating. The lender has many controls/levers
which helps in extracting the information from the borrower. I was astounded thinking
how rating guys will be getting that critical information before giving him the
rating which will decide my loan pricing !!
9. The internal rating
teams of the bank are not under any influence of the borrower since they are
not exposed to the borrower. In most of the cases borrower will not even be
able to know the details of the internal people who are engaged with his
proposal. All information about the borrower/proposal is represented by the
bank’s business/appraisal team. This system proves to be an added layer of
safety. However, in case of external rating agency, its team is fully exposed
to the borrower.
10. Theories supporting
direct linkages between Cost of Funds of a bank and its Lending Rates become
irrelevant.
11. The fee to rating
agency is directly paid by borrower. It’s a peculiar situation, in which rating
agency is not participating in the loan as a lender, taking fee from my borrower,
and deciding my loan pricing!! Specially of long term loans which are not
traded on the exchange and which the bank cannot get rid off the moment bank decides
like in case of Commercial Papers/other traded papers !
