SBI and ICICI Back with Teaser Loans! Its Depositors, Not Borrowers, Who Should Worry - The 5 Minute WrapUp by Equitymaster
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SBI and ICICI Back with Teaser Loans! Its Depositors, Not Borrowers, Who Should Worry

Jan 3, 2017
In this issue:
» Personal Loans Outperformed the Housing Loans...
» PSUs Seeking Exemptions from Huge Dividends to Government...
» ...and more!
00:00
Tanushree Banerjee, Co-Head of Research

J Paul Getty once said, 'If you owe the bank $100, that's your problem. If you owe the bank $100 million, that's the bank's problem.'

Kingfisher's Vijay Mallya knows this too well.

Kingfisher was in the aviation business for seven years. During that time, the company amassed Rs 70 billion in debt. Mallya, the promoter of the company, made no attempt to stem the steady decline of the company's fortunes. And finally, even the biggest bank in the country could not recover its bad loans from Mallya and Kingfisher. SBI still hopes to auction Mallya's properties and recover at least part of the dues.

The bank made a huge mistake offering a cheap loan to a big non-credit worthy borrower like Kingfisher. But what if hundreds of thousands of small borrowers can't service their loans? Whose problem is that - the borrower's or the depositor trusting the bank with his life's savings?

In 2008, SBI was the pioneer of what it is called 'teaser loans'. The brainchild of then SBI chairman OP Bhatt, these dirt-cheap loans allowed SBI to surpass each and every competitor for market share of home loans.

The problem is the rates don't stay low forever. They entice the borrower, irrespective of his credit worthiness, and when the rates go up, the borrower finds he's unable to service the loans.

Past RBI governors Subbarao and Rajan disapproved of these loans, seeing them as a systemic risk. Subbarao even penalised banks offering teaser loans with heavy provisions.

But the country's largest banks, SBI and ICICI, are once again peddling teaser loans. For SBI, the problem isn't non-performing loans. Its NPA ratio is much better than any other PSU bank. As far as ICICI's focus on NPAs is concerned, the less said, the better! So flush with cheap funds in their deposit books, both are looking to grab home loan market share.

Needless to say, the reckless loans could turn into NPAs. And at some point, excessive bad loans could put the banks' solvency at risk.

Now, SBI depositors shouldn't lose too much sleep over this. The bank would likely get bailed out should the situation get that bad.

But what about ICICI? What about the other PSU banks who are likely to follow SBI and ICICI in offering teaser loans? Can they rely on a bailout? Should their depositors be worried?

Frankly, yes. Depositors in other PSU banks have every reason to worry. The NPA problem is far from over, and teaser loans could just be the nail in the coffin.

The recent correction in banking stocks shows that investors are testing the safety of their...and finding the banking sector lacking.

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03:40

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03:45 Chart of the Day

The overall non-food credit growth in 2016 (as of October 2016) grew by ~7% YoY. Within this, agriculture sector grew by 13% YoY, industrial loans declined by 2% and retail loans (includes housing loans) outperformed all the sectors and grew by 17% YoY.

One of the biggest contributor in India's banking loan book growth is housing loans. As per RBI, as of 30th October 2016, it contributed around 54% to the total retail loan book of the banking system.

Given its high growth potential and low NPA characteristics housing has been darling sector for all the banks in India.

However, as per the RBI data, in 2016 growth in personal loans and credit cards surpassed growth in housing loans.

Personal Loans Outperformed Housing Loans

# Include Priority sector loans * Include Vehicle Loans, Consumer durable loans ** As on 30th October 2016.


As of 30th October 2016, the housing loans grew by 17% YoY. Credit cards and personal loans both grew by 29% and 21% YoY respectively.

Now since the contribution of the housing loans to total retail loan portfolio is around 54%, the overall growth of the banking credit largely depends on the growth of the housing sector.

The recent move by the major banks to move back to the teaser loans clearly indicates their inclination towards the revival in the growth of the housing loan book.

04:20

Year after year, the Union Budget is focused on resolving India's fiscal deficit problems. The cost overruns and the low contribution of the direct tax widens the gap between the income and expenditure.

Amid these challenges, one of the means to bridge the gap is the dividends from the high cash generating Public Sector Undertakings (PSUs).

As a law, every PSU is required to pay a minimum dividend of 30% of its net profits or 5% of its net worth, whichever is higher. These companies are required to pay maximum dividend possible and even state governments insist them to borrow to meet the fresh capital needs.

In FY15, the government received Rs 340 billion in the form of dividend declared by 112 state firms. The dividend was around 44% of the net profits of these firms.

As per an article in Economic Times, some of the top run state-run firms, are seeking an exemption from making huge payouts as that may affect their capital expenditure plans and ratings.

It would be interesting to see how it is taken forward because, one side of coin requires increasing productivity and efficiency of these PSUs and the other side requires much needed support to government's balance sheet.

04:45

After opening the day on a flat note, the Indian indices have continued to be flat during the noon trading session. Sectoral indices are trading on a mixed note with telecom and IT stocks leading the losses, while Oil & Gas and Consumer Durables are in demand.

The BSE Sensex is trading up by 78 points while the NSE Nifty is trading up by 30 points. The BSE Mid Cap index is trading up by 0.6% while BSE Small Cap index is trading up by 1%.

04:55 Today'sInvesting Mantra

"Be fearful when others are greedy, be greedy when others are fearful" - Warren Buffet.

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst) and Kunal Thanvi (Research Analyst).

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1 Responses to "SBI and ICICI Back with Teaser Loans! Its Depositors, Not Borrowers, Who Should Worry"

KD

Jan 4, 2017

Credit growth is historic low. Even after reducing rates these banks will not see substantial improvement. Such is the condition of economy.

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