Should Banks Worry About the Muscle Power of Their Corporate Clients?


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Should companies encourage the formation of
such co-operatives, banks may be faced with
a new challenge, namely, to find alternative
lending opportunities to compensate for a
shrinking loan portfolio.

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Should Banks Worry About the Muscle Power of Their Corporate Clients?

  1. 1. Should Banks Worry About the MusclePower of Their Corporate Clients? Universal Banking Solution System Integration Consulting Business Process Outsourcing
  2. 2. Over the last 10 years, the lifestyle of the movement. Should that happen, it could threatenaverage Indian has undergone a sea change. a business that has so far been easy, captive,The emerging India story has endured the ups risk-free and highly remunerative for banks.and downs of the Indian economy, and nowhereis this more evident than in the burgeoning Many large organizations in the country, includingportfolio of luxury class loans of large banks. the public sector banks, have encouraged theThe mindset seems to have changed from that concept of an employee-run thrift and creditof ‘save-to-spend’ to one of ‘spend-to-save’. society. These societies collect a small monthly contribution from member employees towardsIn the early 2000s, private sector banks a thrift or savings fund and pay them adominated the auto finance market, with Citibank reasonable interest / dividend in return. Theleading the pack. However, ICICI Bank was large pool of funds collected in this manner isquick to spot the opportunity and took an made available – as an unsecured consumptionaggressive selling approach to cut down loan or a medium term auto loan – to needyCitibank’s share from 27% to 8% within a few employees at discounted rates. Many of theseyears. It’s own share of the auto finance market self-sustaining vehicles have been runningrose to 29% to script its well-known success story. smoothly since many years.By 2008, other banks, such as HDFC and a Let us take the example of one of the largenumber of public sector institutions, had also companies mentioned earlier. With bank loansawakened to the opportunity. Leading public being available at competitive rates and thesector banks like State Bank of India, Punjab establishment of bank branches and specialNational Bank, Bank of Baroda, Bank of India, counters within its premises, the company hadCanara Bank, Syndicate Bank and Union Bank decided sometime last year to stop all employeeall took a share of this lucrative business in loans. Many of these were automobile loans.the ensuing years. Much of the growth in their At that point of time, the total employee loansbalance sheet and profit in the years 2009 and outstanding on its books was to the tune of2010 may be attributed to this sector. about USD 27 million or about Rs. 1.35 billion. Let us use this example to see how the employeesThe luxury consumption market has benefited of this company can easily generate a similarfrom the dividends of the demographic transition surplus amongst themselves and thereby reducethat the country is going through. On the flip their dependence on the bank.side, the same demographic dividend couldalso lead to catastrophic consequences for the If each of its 140,000 employees were tonew consumption /luxury loan market; it is just contribute Rs. 1000/- per month from theirthat there has been no movement yet in this salary towards this scheme, the collection indirection. Because funds are still available – the very first month itself would be to the tunealbeit on stiff terms – customers, particularly of Rs.140 million. The point to note is thatthose belonging to Generation Y, have not put this contribution is just 3% of the monthlytheir minds to finding alternative or cheaper compensation of the lowest paid cadre of thissources of funding. company and the actual voluntary contribution could be much higher.The economic boom has created some verylarge Indian companies like Reliance, Infosys, • Within 10 months, the contributions wouldWipro, Tata Consultancy Services and Cognizant be able to create a corpus of Rs. 1.35 billion,Technologies etc. and expanded the operations which was the total outstanding loan amountof multinational organizations like IBM and at one time.Accenture. Most of these companies have anemployee strength of 100,000 and more, • With every month’s contribution, this creditendowing them with great muscle power. These society will be able to finance more thanemployees are collectively sitting on a huge pile 400 4-wheeler auto loans or more thanof surplus funds that could be utilized to start a 2000 2-wheeler auto loans. And by the 10thcollaborative self-service cooperative financing month, the installments would themselves Should Banks Worry About the Muscle Power of Their Corporate Clients
  3. 3. be capable of financing another 100 in-house lending platform offers them one 4-wheelers. more way to hold on to employees, who would find it hard to leave when there’s a large loan to• Imagine how large the corpus can grow be repaid. if the monthly contribution touches 5% of monthly compensation, across the hierarchy Should companies encourage the formation of of the organization. such co-operatives, banks may be faced with a new challenge, namely, to find alternative• Given time, the society can enhance its lending opportunities to compensate for a portfolio to include even higher value loans, shrinking loan portfolio. such as mortgages. ReferenceSo, shouldn’t banks be wary of such largeconglomerates? If, as the above example shows, 1. // single cooperative fund can equal 10% of a auto-finance-companies-in-india.htmllarge bank’s auto loan portfolio within one year,imagine what ten of them can do. 2. // show-1-tech-infosys-halts-loan-schemes-for-And what’s in it for these large companies? employees/20110131.htmWhy should they embark upon such anactivity, which is clearly outside their area ofexpertise? What do they gain by stepping intobanking territory? Author Mahesh R.As we know, these companies’ human resources Senior Delivery Manager – Finacleare their most critical asset. They spend large Infosyssums to first acquire and then retain talent. An Should Banks Worry About the Muscle Power of Their Corporate Clients