The consequences of ICICI's entry into the short-term loan segment could be far-reaching.

Whether by announcing differential prime lending rates for long as well as short-term loans the ICICI has set in motion a process of competitive lending one cannot say off hand. On the face of it, the Corporation is threatening to take away the short-term lending business from the IDBI and SBI. For its part, SBI has let it be known that it was ready for a fight and one can expect IDBI also to come out with a combative strategy, and maybe, over time, IFCI too which plans to come up with a banking subsidiary of its own to cater to the working capital needs of corporates, although its Chairman has made it clear that IFCI would not go the ICICI way.

But one wonders if the ICICI can sustain its one-upmanship. Its medium-term loans are to be funded through privately placed deposits at 11-12.5 per cent, to be raised from banks and corporates. The spread the ICICI allows itself is lower than what banks give themselves. IDBI is better placed to service the short-term lending since it only recently completed its bond issue and can use the funds for the purpose. IDBI's short term rate is also pegged at 15 per cent as against ICICI's 13.5 per cent, which gives it greater manoeuvrability.

There is also the wider issue of a change in the role of financial institutions. The Reserve Bank Governor in an interview recently to The Financial Express had mooted the possibility of FIs becoming banks. It might seem that ICICI is taking this suggestion seriously by seeking to provide the loan component of the working capital requirements. Though, as of now, the cash component will be taken care of by banks, over time it can do this also. Even if this really is the intention, SBI can have no objection to that, provided the requisite statutory changes are made.

But then ICICI has not declared itself on this aspect of C Rangarajan's interview. The RBI Governor noted in support of his proposal that in several countries there was really no distinction between short and long-term lending institutions, but there are several aspects of long term lending institutions taking up medium and short term ending and vice versa. These have to be gone into closely before the plunge is taken. Surely ICICI has to calculate the pluses and minuses before seeking to take on banks in their accustomed territory. But how it fares will be known only later.

On the phenomenon of interest rates entering a competitive era, the essential need is for funds to get cheaper. Obviously, the better positioned banks/FIs will be able to get the resources on favourable terms. The question is not ICICI vs others, but between different banks and FIs. Just as lenders follow the big corporates, those with spareable funds would also follow the banks and financial institutions with clout. There is simply no escape from this. We cannot change the market wisdom. The Union Finance Minister under Nehru, T T Krishnamachari, was merely emphasising this when he noted that the banks would be led by the big borrowers and not the other way round. As a successful businessmen, he was, no doubt, speaking from personal experience.

Attracting deposits through high rates of interest and getting credible borrowers through low interest rates are two different things altogether. In respect of the former, several NBFCs have become `blade' companies precisely because of either their wanton neglect of their obligations or inability to service their borrowings or both. Some of them have operated on the principle that they need not return the money they have taken. But in regard to what they themselves lend they have to be pretty sure of the loans not turning sticky. These should be performing assets, not non-performing assets (NPAs). When the spread between the cost of raising funds and lending them is very small, the margin of error has to be very small. When NPAs turn out to be substantial, bankruptcy is inevitable even when the spread is liberal, as was evidenced in the Indian Bank's massive failure.

Thus when the FIs and banking institutions operate on the basis of a spread on par with international standards, then the efficiency level has to be very high. That this has to be the general rule here does not need underscoring. The question whether ICICI can be perpetually on a razor's edge and still flourish is something that cannot be answered off hand. It should be stronger after the merger with SCICI and its results for 1996-97 have been truly spectacular. but whether it will be so strong as to give its established competitors in the small and medium term loan segment a run for their money will become clear only when things hot up.

The RBI Governor surely would not have merely thrown up a stray idea when he spoke of the logic of the barrier between short-term and long-term lending having to be broken. The Governor must have examined the likely consequences. But then the ground realities will be different when all FIs get into the short and medium term lending segment and banks for their part start taking up long-term lending. Ultimately, it is not the nation's central bank that will take the burden of the market players when there is a crisis later on. It will only set the ground rules and it is for the banks and FIs to ensure that they do not run up bad debts and simultaneously fail to raise low cost funds to sustain their lending operations.

So many things have to change in the operations of banks/FIs. Primarily, their overheads have to be drastically reduced. There has to be greater computerisation. The trade unions, which only know how to demand and get more year after year, must readily accept rationalisation of the workforce. As for bank managers, the kind of favouritism either on their own or under orders from the top that has become common place over the years must be eschewed.

Obviously, the time has come for the Central Government to review the role of SLR and CRR and to phase out social lending. Banks cannot be more than neck deep in fulfilment of social obligations and still be able to keep a small spread between lending and borrowing costs. As for FIs, as of now they are at an advantage in that they do not have to share any of the Government's social obligations, but as for banks they can legitimately demand a level playing ground, either by way of FIs sharing their social burden or they themselves doing only with those obligations that they can meet without straining their bottom line.

SBI can raise this demand as part of the strategy to combat the threat posed by the ICICI and the Government cannot ignore this. What will be the response of ICICI, IDBI and IFCI when they are asked to share the banks' burden of priority sector lending and SLR and CRR? All these issues need to be closely examined. While ICICI has not quite set the cat among the pigeons, it has certainly focussed on the operational consequences of FIs beginning to function as banks. The Reserve Bank and the Union Finance Ministry, not necessarily in that order, have to take note.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.