Mamamiya – Bang – Bang : Outsourcing the loan pricing !!

 

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 !