During the period between March 28 to September 26 this year, non-food credit from commercial banks went down by Rs 1,361 crore while investments by banks in corporate debt instruments such as bonds, debentures and preference shares grew by Rs 4,793 crore. The trend mirrors a growing tendency on the part of banks worldwide to fund corporates' working capital requirements more through debt instruments rather than through the traditional demand loan or cash credit route. But is the banking industry in India ready for this transition?

For one, the thin spreads arising out of low coupons are bound to hit banks' interest incomes. What is even more worrisome is the tenuous security that the investment route offers vis a vis direct lending, where the bank often has an ongoing relationship with the borrower. Moreover, since disinvestment is a problem in the inactive debt markets, many bank treasurers prefer to go in for 18 month debentures, where even a rating is not mandatory. Under such circumstances, the treasurer has to rely wholly on information provided by the company--which, in the case of private placements, is inadequate in India. Furthermore, since in the case of investment, the charge on assets is created after the placement, some corporates are in no hurry to speed up the process. They do all they can to violate the 60 day deadline within which the relevant form 8 and form 13 have to be lodged with the registrar of companies to create the charge on assets. Yet another hazard is that the somnolent Indian debt markets do not reflect a sudden downturn in a company's fortunes since many debt instruments are not even listed, let alone traded. Evidently, banks are following international trends in corporate funding even before the legal framework for mandatory disclosures in private placements have reached global standards. And this trend of convenience, once set, is not likely to change. In fact, as investments balloon, banks will be tempted to go in even for second rung issues in the lure of higher coupon rates. What is needed is proper regulation for private placements making relevant disclosures mandatory, so that bankers can at least take a conscious decision. There is also a need for greater synergy between the credit departments and treasuries of banks, where the former can fill many gaps in terms of information on companies, especially in cases where the issuer is also a regular borrower. Unless these changes come in fast, banks will soon find themselves unsecured creditors, standing last in the queue in the event of defaults.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.