BANKS IN FOR A ‘COLLATERAL’ SHOCK

ET INTELLIGENCE GROUP

INDIA Inc may have escaped the sub-prime crisis with a few minor bruises, but lurking in the background is a potential source of big risk for banks. According to an ETIG study, the share of unsecured borrowings of India Inc has risen steadily in the past five years, with close to half of total borrowings offering no collateral. The share of unsecured borrowings, which was just 31.1% of the total borrowings of Corporate India in FY03, has shot up to 43.9% during FY08. And the top 20 borrowers accounted for 56% of the total volume of unsecured loans.
   Unsecured borrowing refers to the practice of borrowing without any asset provided by the borrower to back it. Lenders such as banks usually negotiated such loans with their bigger and older clients who have a good credit history. As the lender has no claims on any asset, there is a bigger risk of loss in case of a default.
   Usually, such unsecured loans are short-term in nature, but can be rolled over, which means that the tenure of such loans can be extended.

RIL,Tata Steel among biggest unsecured debt holders


   THE ETIG study, which considered a sample size of more than 2,000 listed companies, showed the total unsecured borrowings stood at Rs 2.92 lakh crore (about $62 billion at current exchange rates) during FY08, more than three times the figure during FY03, when it was a mere Rs 93,246 crore.
   "Many companies' working capital requirements were met through short-term borrowings as the market conditions were very good and cost of funds was low. For short-term fund requirements, firms could have gone for unsecured borrowings. As a lender, I see the balance sheet and project before lending. If the end-use of the funds is ensured then there is no problem in giving unsecured loans," says Bank of Baroda's MD & chairman, MD Mallya.
   Other bankers also say a rise in unsecured lending may not necessarily mean indiscriminate lending. "The banking industry has changed its focus in the past few years, from a security-oriented lending to more risk-assessment based lending where the borrower basically has to have a good track record and a sound project to be able to borrow. The world over, there has been a shift in lending to risk-assessment-based lending. Going by security-based lending, even a bad guy would become eligible as the loan would be secured," explains PNB's chief GM (bank credit) Arun Kaul.
   He adds that one of the reasons for large increase in unsecured loans could be due to lending to infrastructure projects. Lending in infrastructure projects, which has picked up big time over the past five years, is mostly through unsecured loans. The study reveals the practice is more pronounced in case of larger borrowers. For the top 20 borrowers, who account for 42% of total debt of the companies in the sample, unsecured borrowing constitutes 58.6% of their loan portfolio, up from 40% in FY03. For these companies, almost 70% of fresh loans taken during FY03-08 period has come in the form of unsecured borrowing. Among the companies who have high debt levels (Rs 5,000-crore plus) and have a big chunk in the form of unsecured borrowings are Bharti Airtel, Reliance Industries and Tata Steel, besides some public sector majors — IOC, HPCL, BPCL and NTPC. All these companies have more than 75% of their debt in the form of unsecured borrowing. However, for the three oil sector majors a large part of such loans are short term in nature. Companies such as Essar Oil, Essar Steel, Ispat and Jet Airways have a low level of unsecured borrowings at 10-12%.
   Mining and oil sector show the highest level of unsecured borrowing at 86% and 68%, respectively. Transport equipment and power are otherS with more than 55% of unsecured debt. Textiles and cement & cement products have relatively low levels of unsecured credit. Notably, textiles and power are the only sectors,which have seen a reduction in the level of unsecured debt during FY03-08 period.