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The Equitymaster Research Digest

When Banks Call Their Customers Hidden Treasures
May 10, 2016

  • Boring banking vs Universal banking
  • A recent SBI update uses intriguing language
  • ICICI punished beyond guilt?

The banker's job is to keep depositors' money safe. To that end, they must lend it prudently to credit worthy borrowers. But that's boring banking. And apart from the spread, it doesn't put any extras on the banker's plate.

Universal banking solved that problem. Banks were able to actively contribute to the profitability of their borrowers. They helped corporate borrowers trade with their surplus cash, hedge their risks, and even get into derivatives. As the corporates' other income soared, so did their banks' commissions. It was a win-win...until 2008.

It took Lehman Brothers' bankruptcy to convince regulators that the banker-cum-financial advisor is a dangerous combination. Bankers then had to justify their profit motive while recommending treasury positions to clients. But the inclination to get more from borrowers never went away.

Indian banks, primarily the big ticket corporate lenders, are currently in bad shape. Their inclination to fund the ambitions of big borrowers has led them to compromise on their credit quality. When banks in the rest of the world were getting cautious about lending quality, most Indian banks went in the opposite direction.

Between 2009 and 2012, they went overboard with big ticket corporate lending. However, by the time they realised some of the loans were of bad quality, they had help at hand. Most of the banks indulging their corporate clients with big loans were public sector banks. The government allowed them to restructure their corporate loans when they started to become non-performing assets (NPAs). And for the last three years, these banks accumulated restructured assets worth billions of rupees.

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