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Wednesday, March 16, 2011

PSU banks get into the loan syndication business

India's state-run banks are hardly known for being nimble. It has often been the case that they wait to take cues from some of the bigger private banks when it comes to venturing into new business segments. It is that fleet footedness which has contributed significantly to foreign and private banks doing well. But signs of changes appear to be visible now.

State-backed lenders have set their sights on the . 3,00,000-crore loan syndication market. This is a market segment where large institutions operate as arrangers of debt for corporates. These institutions and their treasurers use their contacts and old ties to persuade banks, mutual funds and insurance companies to lend money to corporates .

This is more of intermediation without the need for setting aside much capital and with the promise of decent fee income. Once in a while, the large banks do buy out deals where they subscribe to the entire bond issue or underwrite the entire loan contracted by a corporate borrower. Subsequently, they down sell most of the bonds or the loan to many institutions, including banks, financial companies, pension and provident funds, effectively lowering their risk. Over the past one year, slowly but steadily, a number of state-owned banks have entered this segment long dominated by the investment banking arm of the State Bank of India ? SBI Caps.

"The idea is to earn fee income and leverage on corporate relationship," said MD Mallya, CMD of Bank of Baroda, which has a syndication desk within the bank, whose subsidiary BoB Capital Market also has a similar man-date to boost fee income. Efforts mounted by state-owned banks have paid off. Three public sector banks ? Bank of India, Bank of Baroda and Punjab National Bank ? which had no presence in loan syndication featured among the top 10 in loan syndication in 2010, according to Bloomberg. "We observed that a lot of our customers were going to other banks for syndication . Our relationship with corporates is quite strong.

So, we felt that why shouldn't we develop expertise in this field," said BA Prabhakar, executive director of the Mumbai based Bank of India, which ranked sixth in 2010 in loan syndication in the Bloomberg tables. The loan syndication business is two-decade old in this country. Earlier , it was left to, say, a chartered accountant to pitch with a bank for a loan on behalf of clients. SBI Capital Markets was the first major entrant. It rode on the SBI brand and emerged as an undisputed number one in this segment followed by IDBI Bank and Axis Bank. The two major components of loan syndication are originating business and the capacity to sell down the loan or debt.

Earlier , most banks which were syndicators of loans retained the loan on their books. But they were quick to realise that there was money to be made by churning the portfolio . The culture of underwriting and selling down the loan to other lenders started with the entry of ICICI Bank and Axis Bank , with IDFC , Yes Bank and ING Vysya Bank being among the relatively new entrants.

Source: EconomicTimes


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