The immediate fallout of the US crisis

US crisis

When a giant tree falls, the impact is felt all around. The financial crisis on Wall Street will have its repurcussions for Indian corporates and the subsidiaries of failed blue chip investment banks such as Lehman and Merrill Lynch in India.

Financing costs have risen sharply and some of the banks, even Indian banks, have gone back on financing deals. There have been cases where corporates which had gone to these banks lured by cheap financing suddenly found themselves caught on the wrong foot. Banks which had originally promised them cheap financing options, reneged on the deals. By the time they went to other banks, financing costs had risen by 20-30%. These corporates had already given firm order for plants on the back of the earlier commitment from banks.

Indian banks too have started tightening the noose on credit. Most banks have started going slow on proposals and are looking not only at the best possible returns but also at the safety factor. Because of the subprime collapse, financing costs for these banks have also gone up drastically. In the past few months, most Indian banks have not tapped the international debt market. Financing costs for most corporates have gone up by up to five times in the past one year. With financing under pressure, fees on loans have at least doubled in the past one year. Most Indian and foreign banks feel that the crisis could last till next year and they now want to play safe.

Investment bankers who could until a year ago choose their jobs are now being rendered unemployed. Bonuses which were paid in stock are now worth nearly 70% less than what they were. The total investment banking fees for the year is already down by 44.1% to $563 million, according to Thomson Reuters. The sharpest fall in fees has been in the equity market, where fees are down by 73.9% to $105.8 million. M&A fees were also down by 27.9% to $352 million. Loans are the only business where fees have gone up marginally.

It’s not just investment banks alone who are feeling the pain. On the back of the subprime crisis, a credit scare has turned lenders extremely risk-averse and financing has become a serious issue. Most bankers feel that multi-billion dollar overseas takeovers could be few and far in between. Corporates are likely to use their cash reserves for acquisitions than taking fresh debt on their balance sheets. Incidentally, a couple of corporates which had announced major acquisitions a couple of months earlier have not been able to line up financing till date.

Indian corporates are getting ready for either shelving projects or delaying implementation. “The demand for capital in a growing economy is high. New projects require both debt and equity; liquidity in the international markets for both these sources has dried up. Risk appetite for the banks is very low and the same is a reflection of the negligible volumes in debt markets. This could impact build-up of new capacities thereby adversely affecting growth projections, “ said Neeraj Gupta, CEO, Essar Capital. Even as officially most banks say that they are still offering financing to Indian corporates, the truth is far from that. There are few banks internationally “which are open to business.”

However, there are seeds of opportunity in every crisis. Most bankers — even foreign banks — now feel that some of the Indian players would have a slightly better hand. Indian firms like Kotak Mahindra, Ambit, Motilal Oswal and others which have been in the business are expected to benefit from the ongoing turmoil even as a host of corporate groups are looking at building their i-banking teams. “Even though the board has given us the approval to build a team, we were unable to do so as the salary levels were very high. Now we could use this opportunity and look at some people,” said the head of M&A at a private sector bank.


Among foreign institutions, firms like StanChart, Credit Suisse, Goldman Sachs, Royal Bank of Scotland and Morgan Stanley are likely to benefit from the ongoing events. Corporate heads say the origins of investment banking companies hardly matter for Indian corporates, as currently, the Indian investment banking companies are too small when compared to their international peers. In order to raise funds for big-ticket acquisitions, the corporates leaders say they would still hire foreign banks because of their deep pockets and global reach. “The origins does not really matter. When a corporate needs funds, they will approach any investment banker who can arrange for funds,” points Mr Gupta.

Says TV Raghunath, ED and head M&A, Kotak Mahindra Capital, “Being part of the global franchise may not by itself help a firm in winning a mandate. What would help the firm is their on-the-ground ability as also the issue of credibility and dependability. We see this as an opportunity to expand , at the same time not being irrationally exuberant, to build our business. If you are a long-term player committed to India, this is the time to build.”

But what about the Indian employees of the blue chip investment banks who have been the first casualties of the collapse? Although some may have to live with pay cuts, the situation is not so dire considering that the job market was red-hot until last year. The number of professionals earning million dollars and above had seen a rise of around 30-40% in 2007. New players like Lehman Brothers were offering up to four times existing salaries. Indian firms and banks and even existing foreign firms were finding it tough to retain star employees. Bonuses from 2003 to 2007 had seen a secular rise and almost every investment banker had a job offer letter in his pocket and “Exuberant or disruptive salary levels will go. Good guys would however always have options,” says Mr Raghunath.


17 Sep, 2008,
George Smith Alexander & Dev Chatterjee, ET Bureau

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