The Hindu Business Line : PSU banks plan loan syndication cartel

THERE'S bad news for big borrowers. The country's public sector banks, at least the big few, are understood to be sounding one another out to create a cartel in the loan syndication market.

Highly placed banking sources told Business Line that bankers were tired of the bloodbath in the loan market, with banks undercutting each other just "to stay competitive".

The cash-rich State Bank of India (SBI) is understood to have taken the lead to put a group of lenders together that would not lend below a certain rate of interest. SBI, the largest commercial bank in the country, has reportedly broached Bank of India, Bank of Baroda, Syndicate Bank and Union Bank of India with the proposal.

According to bankers, if these banks also manage to get ICICI Bank, the largest private sector bank, on their side, the cartel would control the lion's share of the debt market. They said the cartel may be formed in about six months. "Let us see how the league table (list of debt placements) looks like. And then we will take a view," said a proponent of the move.

The banks are ranging together to withstand the onslaught of foreign banks that have been dominating the loan syndication market for some time now. It would put considerable pressure on the nimble-footed foreign banks that have been cornering many of the large, lucrative deals. Foreign banks and new private sector banks are fast in decision-making and with their capability to leverage their large balance sheets, take away the plum issues and sell it down for huge profits, said a banker. According to another banker, "Right now the borrower can afford to dictate terms in the market. In fact, they invite bids from all banks to see what rates they may offer. Banks until now have been falling over themselves to get business through treasury operations as commercial lending has not been very profitable."

The race has even cost banks their margins. A senior banker said, "One of the main problems with public sector banks in India is they have been too busy trying to outbid each other in the market and in the process many times ending up quoting much lesser than their cost of funds."

Public sector banks are now waking up to marketing strategies. "This is one area where foreign banks excel. Indian banks never keep in touch with the issuers of syndicated loans. As a result, they are invariably slow to catch on," he added.

However, not all agree that a cartel can be too effective in a market swollen with liquidity but scarce in top-rated borrowers. "Foreign banks have relationships with a large number of cash-rich investors. So they are able to use funds they would have put in the call money market to take entire offerings by themselves and then sell it down to the investors," said a merchant banker.

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