ICICI''s CFO, NS Kannan, discusses the bank''s borrowing strategies.

How have your borrowing requirements changed since the merger between ICICI Limited and ICIC Bank?

Kannan: ICICI Limited was predominantly a project finance institution. On the asset side we had infrastructure finance and manufacturing project financing and so on. And on the liability side we had relied almost exclusively on long-dated fixed maturity loans. This is how the parent's balance sheet was financed prior to the merger. We had subsidiary in which the parent held 46%, which was a local commercial banking entity that was permitted by our central bank to raise domestic deposits and checking accounts.

When these two entities merged the primary issue on the funding was to replace the parent's long-dated fixed maturity liabilities and replace them with bank deposits, so this became one of the key motivators of our borrowing programme and over the last year we have successfully refinanced a substantial part of those borrowings.

How have you gone about this?

One of the thrusts of our company has been to increase the proportion of local deposits within the overall deposit base; that is an inherent part of our strategy, so that we do not pay too much to the market and keep our funding costs down. Apart from the deposit-taking we also look to some of the refinancing that is available from some of the Indian institutions for a sepcified part of our lending businesses, such as agricultural lending and housing lending. And we tend to actively seek financing from such institutions so long as it makes sense from our overall cost of funds. We have also sought to securitize of some of our assets.

Over a period of time we have established ourselves as a very good originator both on the corporate side and the retail side. There are not many very strong originators of assets in the domestic financial system today so this is one of the areas we have been carefully developing over the past few years. An additional point is that we also have a significant share of international borrowings in our overall programme. This is governed by domestic regulation in terms of what we can do, how much we can do and what we cannot do. Within those regulations we tend to maximize our borrowings from the perspective of keeping our overall cost of funds down and keeping in mind our clients' requirements.

You recently launched India's collateralized debt obligation. Your first attempt to do so, in March 2002, didn't take off. What was different this time?

The market itself has developed over the past two years in terms of recognizing securitization as a possible tool for asset accumulation by investors. That realization has come in only in the recent past. We also have been one of the key developers for this market, by starting to place some plain vanilla bonds, then slowly moving the investors up the curve by adding on some structures such as auto pools, mortgage pools and so on.

Once investors started getting comfortable with such structures and also saw the performance of issues we had done in the past, they started coming to us and saying, 'Why don't you give us some assets of such-and-such maturity with this kind of broad underlying paper'. So it was really a two-way process after that to see if we could package something to meet with their requirements. That is how this whole programme has developed over the last two years.

What further developments do you expect in the securitization market?

We are already using it quite commonly. It really depends on market conditions, as well as on my own evaluation as to whether it's better for me to hold assets on my books or sell them down, but in some way I would really be there in the market all the time, with a view to develop the market and to keep the interest going in this segment.

When was the last time you borrowed offshore?

We did the $300 million eurobond deal last October, which was the first such Indian paper in six years and had a very good response; it had a subscription of $1.5 billion. The book was really built in one-and-a-half days and was in fact priced tighter than the loan markets. That was one of the motivations; we could really take that window of opportunity and quickly go and establish this programme and get the money. The pricing was much tighter than what we would have got in the bank loan market at that time: 106bp over Libor, all-in cost with a five-year bullet facility.

How important is the cost of funds to your programme?

Actually we look at the requirement of such funds in our balance sheet. There are some customers who have a natural hedge in terms of the ability to absorb foreign currency borrowings economically. So for those kind of clients it is imperative I have a pool of foreign currency funds available and that determines my appetite. In the case of the last eurobond it came in very handy in terms of the past borrowing because it was rupee borrowing that got converted into foreign currency borrowing, given the ability of the borrower to absorb foreign currency better than the rupee.

Having decided on the appetite we decide if it is better to produce synthetic foreign currency using rupee or actually go ahead and do the foreign currency borrowing. We also use foreign currency borrowing, to the extent possible, and convert it into rupee for on-lending in rupee. In such situations the philosophy for costing is that on a fully hedged basis it makes sense to go down the foreign currency route and produce rupee, rather than borrowing domestically in the rupee market.

What is your maturity profile?

If you look at the deposit market in the country predominantly all the deposit markets are roughly in the one-year time frame; that is where the big money comes in the system. If you look at our own balance sheet on the asset side, the key growth area for our company is retail financing, although roughly 50% of the retail financing is mortgage financing and almost all of the mortgages we write are floating rate mortgages, so though you could be talking about a long-tenor mortgage, effectively the interest rate gets re-set every three months. So when looking at my borrowing programme I have to balance my liquidity requirement and the interest-rate risk requirement; we would be very comfortable in terms of the interest rate risks of running short-maturity liabilities and also short-duration assets. That is how we manage our portfolio.

From time to time we also access the domestic retail market with bond issuance that is typically of three-year maturity. And the foreign borrowings are governed by the maturity restrictions of the State Bank of India, which in the recent case was a minimum of five years. So there is an array of products available to me from retail to corporate, with maturities ranging from a three-month deposit to a five-year borrowing.

What are your attractions as a credit?

As a credit we are really a diversified proxy for India. That is how we see ourselves, because we have a very well-diversified asset base. That is the chief attraction.

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