The Big Story

Lender's discontent

StanChart’s aggressive roadmap for wholesale banking in India has come at the cost of a bloodied balance sheet

In September last year, Standard Chartered was on the lookout for someone who could run its India operations. All was not well with the London-headquartered bank and India was proving to be a big pain point. Quite a few candidates were interviewed for this high-profile position, most of whom had cut their teeth in investment banking. But this little detail was making Bill Winters, the bank’s global CEO, distinctly uncomfortable. After a couple of no-good weeks, Winters made it clear that he wanted only a traditional banker for the top job in India. “I want someone who understands debt, not people who can close deals over dinner” is what he reportedly told close associates. It was a message that was devoid of ambiguity, which might be why the bank announced the appointment of Zarin Daruwala of ICICI Bank as its India head by the second week of November. A wholesale banking veteran, Daruwala has spent over 26 years with ICICI Bank, most of them in corporate banking and project finance. Although Winters is probably happy with this appointment (given Daruwala’s previous profile), it has been quite a long wait for StanChart, as the bank is often called. The bank has been without an India CEO since Sunil Kaushal was moved to Dubai as the head of Africa and west Asia. Daruwala, for whom this will be the first stint with a foreign bank, is scheduled to take charge in April this year.

In many ways, life has come full circle for the bank in India. StanChart, which till 2000 was largely in the retail business in India, ventured into wholesale banking soon after the buyout of Grindlays’ west and south Asia businesses around 2002. Around the same time, a decision was taken by the bank to go the whole hog in corporate banking by exploiting the balance sheet. At that point, the bank’s bosses in India estimated that the return on equity from the corporate banking business for StanChart — and most others — was 10% at best. By offering a suite of services such as working capital, forex, M&A and loan syndication, the bank could take that number to 17-18%. These numbers sold the wholesale story at StanChart. In fact, group CEO Mervyn Davies was quoted jocularly quipping to employees back then that he would shut the bank’s wholesale banking division if it didn’t grow. By the end of 2003, StanChart had established its M&A advisory and corporate finance teams in India; its wholesale banking story had now officially begun. Within seven years, the India business turned into the proverbial jewel in the crown for the group, accounting for over $1.2 billion in profit (on an income of $2 billion), or 20% of the bank’s global profit. StanChart remained unscathed even during the 2008 global financial crisis. Shortly thereafter, a decision to intensify Asia-focused wholesale banking was taken, with India being a pivot in this story. 

By 2015, that strategy had come a cropper and StanChart India ended up with a loss of $1 billion; in fact, many of its top brass had quietly moved on. This fall from grace is hard to understand, especially given the position of strength that the bank was in. But one thing is clear — the aggression and the thirst for growth gave rise to indiscriminate lending, which cost the bank dearly. Many of the companies that it lent to are today in financial distress, with no clarity about the fate of the loans handed out. This has left the folks in London rather rattled, and this is evident in the bank’s annual report for 2015; it revealed a global loss of $1.5 billion, the first time since 1989 that the bank has been in the red. India has contributed to this mess in no small measure, and the task at hand for Daruwala is to get this operation back on track. But given the layers of slip-ups, this is going to be a long process. 

Wholesale problem
In early 2008, StanChart put in place a strategic client coverage group (SCCG) with the sole objective of being the bank of choice for the top 10 corporate groups in markets such as Asia and Africa. In other words, every banking requirement of these groups — from advice on M&A transactions and acquisition financing to putting together large sums of money to fund expansion —would be the bank’s priority. This move, in one stroke, ensured that the bank was establishing relationships with large Indian business groups such as Tata, Essar, Adani, GVK and GMR. This was in line with the bank’s focus on Asia and adjoining regions, roughly around the time the global crisis was taking its toll on the fortunes of many large banks. During this period, senior corporate banking executives at StanChart India made several presentations about how smart they were and how the likes of Citi and UBS were floundering. The ‘achievement’ they were so chuffed about was said to be the brainchild of Mike Rees, the then head of wholesale banking for the group, who eventually became deputy CEO in April 2014. But this focus on Indian business houses did not quite have the desired outcome. “These loans were badly structured, with the bank in many cases having lent money to the holding company. These holding companies always had a huge debt component and they offered nothing more than shares as collateral to the bank,” says a rival foreign banker. These loans were rationalised to the top management with the justification that they were at 12.5-13% interest, about 2% more than what the bank would normally charge.

It naturally took a while for the bank to convince the Indian business houses as well. Despite several rounds of meetings between the top brass at StanChart and their counterparts, there was very little headway. The biggest reason was that these companies were already in long-term relationships with banks — both PSU and private — that already offered a suite of services, such as funding working capital requirements, providing salary accounts to employees and credit cards. The 12% interest rate that the bank used to convince its top management about these deals actually turned out to be a deal-breaker, given that other banks were charging a significantly lower 9.5-10%. At this point, StanChart decided to start looking at corporates such as Essar and Videocon among others. 

But this wasn’t the most surprising move by the Bank — that honour is reserved for the decision to get Rahul Goswamy, who was then running the corporate advisory business, to head the SCCG. “It was clear that the cheque book had moved to someone with an M&A background and this person was now taking decisions about who should get the money,” recalls the rival banker. By the end of 2003, the bank had set up M&A and corporate advisory teams in India and roped in Prahlad Shantigram of DSP Merrill Lynch and V Anantharaman of Deutsche Bank to run the respective businesses. For almost five years, the bank was involved in big-ticket transactions such as Tata Steel’s acquisition of Millennium Steel, HCL Technologies’ buyout of Axon, United Spirits’ acquisition of Whyte and Mackay, VSNL’s buyout of Teleglobe and the controversial acquisition of Aircel by Malaysia’s Maxis. At the time, the bank was drawing from the strength of its global balance sheet and was lending actively. In the case of the $12-billion buyout of Corus, it was — with Citigroup and ABN Amro — part of a syndicate that financed the deal. 

This aggression paid off for the bank and, as per Thomson Reuters rankings, Standard Chartered was fifth on the M&A league tables for fees earned in 2005, and the second position the following year. For an upstart like StanChart, this was quite impressive, since it had managed to move past more established names such as Merrill Lynch, UBS and Deutsche Bank. Prior to its aggressive focus, the loans made by the bank in India ranged between Rs.6 crore to Rs.70 crore. But with the SCCG and the strength of the bank’s global balance sheet, it started lending larger amounts, either on its own or by being the lead in a consortium. In mid-2010, it advised Bharti Airtel on its $10.7-billion acquisition of Kuwait-based Zain Telecom’s African operations. The bank also led the $8 billion financing for the deal and committed $1.3 billion, making it the largest contributor. By 2010, the M&A and corporate finance teams at StanChart were working in tandem. 

From a P&L point of view, this arrangement worked remarkably well, since the M&A fee for any deal — around 0.75% of its value — would flow in immediately. In fact, funding Essar to take control of its JV with Hutchison in 2006 ensured a fee of $100 million, that too at a time when the entire consumer banking business in India was making a profit of just $65 million. The deal convinced the top brass that the way forward was corporate banking, but at the expense of consumer banking. At the bank’s headquarters, too, wholesale banking continued to be the buzzword under the exclusive supervision of Rees, who is said to have nursed ambitions of succeeding the then CEO Peter Sands. At one point in 2010, the bank’s India business was raking in more profit than the Hong Kong one — something the wholesale banking team boasted about quite a lot and quite often during internal meetings. Conveniently, no one ever discussed the fact that the Hong Kong arm was raking it in through consumer banking and not wholesale; the situation was the other way around in India.

Matters reached a point where the wholesale and retail banking teams started reporting directly to the respective regional bosses, who, in turn, reported to Rees. Effectively, the country heads ended up having very little power, with most of it vested with Rees or the people he had chosen. A former StanChart banker reveals that the office environment got highly politicised. “In many ways, Rees was more important than Sands, with chairman John Peace, too, backing him,” he adds. In fact, the then India CEO Neeraj Swaroop, who had joined StanChart after having run consumer banking at HDFC Bank, too, ended up being sidelined. Swaroop was clearly not a votary of the undue focus on wholesale banking as early as FY06, when the bank’s balance sheet was just Rs.46,000 crore. In 2007, during a media interaction, he was quoted saying, “Our strategy is not to increase the loan book alone. In fact, 80% of our revenue from wholesale banking comes from non-lending activities.” In fact, even in FY09, StanChart’s loan book grew only by 12%. “We continue to grow our consumer and wholesale banking book,” Swaroop had then explained. 

But between 2010 and 2012, the balance sheet ballooned from Rs.89,544 crore to Rs.121,000 crore, and so did the M&A team. V Shankar, head of the corporate and institutional banking businesses, was in March 2010 made CEO of StanChart’s non-Asian business. By then, he had gained the reputation of having built the bank’s M&A, advisory and structured finance businesses across many of its core markets. Shortly before Shankar’s appointment, Jaspal Bindra was made the head of StanChart’s Asia business. Bindra’s earlier assignments at the bank included being the global head of client relationships for wholesale banking and the CEO for India. He, too, came from an investment banking background and spent time at UBS before moving to StanChart. Not only was the M&A team in complete charge now, but, more importantly, responsibilities across geographies had been delineated. The thinking was clear — capitalise on existing M&As and client relationships to further wholesale banking. In fact, a senior official during one of his visits to India was so alarmed by the overconfidence and arrogance of the corporate banking team that he remarked, “These guys have bet on the bank’s balance sheet. Is this a bank or a casino?”

In fact, bonuses also tilted in favour of corporate banking with rainmakers routinely earning 4x the bonus drawn by their consumer banking counterparts. Things came to such a head that in 2009, during a routine team dinner in Delhi, the corporate banking team gathered at the table where Rees was present and over the next three hours, the conversation there revolved around yachts, luxury cars and expensive watches. “It was a scary sight and it was clear that hubris had set in. Someone needed to tell them that lending was the easiest thing to do in banking; recovery was the real challenge,” recalls another former StanChart executive. 

Eventually, the bank ran out of luck. In July 2010, RBI slapped StanChart with a Rs.5 lakh fine on grounds that it had not furnished within the stipulated time information on a foreign currency facility that it had arranged for an offshore special purpose vehicle. In April the following year, the central bank again fined StanChart Rs.10 lakh for having sold derivatives products to companies that did not have risk-management policies. By this time, pressure to replace the top brass at the bank was building up. In June 2011, Swaroop was moved to Singapore to oversee southeast Asia operations, amid rumours that the soft-spoken CEO had been made the fall guy. In reality, the contentious deals that led to Swaroop being shunted out were actually handled by Rees, with the senior team in India having very little to do with any of them. The former StanChart employee, who was closely related to both the developments, recalls that the moment Swaroop was moved, it became absolutely clear that Rees was the man in charge. “The role of the India CEO had by then been reduced to one of governance, with no P&L responsibility. It was just a matter of time before more people were moved to less important jobs or simply sacked,” he says. Although StanChart announced Swaroop’s appointment as Singapore CEO in March 2014, he would stay on for just over a year before quitting in October 2015.

Feeling the heat
One look at StanChart’s 2015 annual report is enough to understand its precarious position in India right now. The almost unbelievable shift from $1 billion in profit six years ago to an equally large loss has prompted the bank to take swift steps. For starters, the net exposure to India is down from a peak of $42 billion in 2012 to $30 billion in 2015. China, the other large market in Asia, has seen its exposure drop to $50 billion in 2015 compared with $71 billion the preceding year. Net interest income in India fell from $966 million in 2014 to $921 million last year. That said, the real hit has come from an eight-fold increase in impairment losses on loans and other credit risk provisions (from $171 million in 2014 to $1.34 billion last year). This impairment figure is the highest across any geography in 2015, with the UK arm coming in next at $654 million. In its annual report, the management has said that impairments increased significantly because of exposure to commodities and challenges in India, where corporates were impacted by continuous stress on their balance sheets, coupled with a more challenging refinancing environment. That is unlikely to change in a hurry, though, and this is evident from how explicit the annual report is about increasing provisions for impairment, “largely to reflect lower commodity prices as well as further deterioration in India”. According to KC Chakrabarty, former deputy governor of RBI, foreign banks increased the size of their balance sheets with respect to India around 2007-08. “This was accompanied by Indian banks increasing their exposure to overseas assets as well. This gave companies the confidence to go in for very expensive acquisitions, since liquidity was easily available,” he says. 

Chakrabarty points out that the warning signs for the fall of the wholesale business were obvious even back in 2006. “Excessive lending by banks was a clear symptom and there was no doubt that slippage was on the rise. At the end of the day, the job of a lender is to be extremely conservative. In many instances, even the basic due diligence was not performed,” he says. At one point, additional exposure was given to clients (rerouted as interest earned to cushion income) making the 2008 P&L look really impressive. Of course, all this while, StanChart’s executives were living life king-size, says the former StanChart banker. Their borrowers ensured that these bankers sailed in their largest yachts, used private jets to fly off to exotic destinations and handed over tickets to private boxes at cricket stadiums. But the strain on the books became clear in 2014, when the bank’s profit almost halved to $561 million from that in 2010. At that point, Hong Kong and Singapore were the bank’s two most profitable businesses, a fact that remained unchanged in 2015. By the time the results for the first half of 2015 were declared, the sense of fear and foreboding was palpable; India had registered a loss of $276 million. After announcing the full year’s numbers, the bank said it would knock off 15,000 jobs globally (150 in India, including 35 from the equities business, which was shut down across the world in January 2015), and it declared neither dividends nor bonuses for its top brass. 

“Project financing of cyclicals, which includes commodities such as steel and cement, is a specialised process, much like project financing for infrastructure. This needs a 15-year horizon,” says MK Sinha, managing partner and CEO, IDFC Alternatives. Clearly, StanChart’s executives did not possess the right skill set for this field. Of all the slip-ups by the bank, the most significant lending decision was to back Essar Group’s expansion in steel, shipping and oil and ports, which resulted in loans of close to $3 billion being handed out beginning 2009. The group’s $18-billion spree of investments aimed at boosting capacity at steel plants, oil refineries and ports came unstuck, as commodities went into a downward spiral amid a global slowdown led by China’s hard landing. Winters in an earlier media interview had stated, “We became more comfortable in lending on an unsecured basis rather than a secured basis, lending on a holding company level rather than an operating company.” Those closely involved in the transaction — Shankar and Bindra — moved out of the bank last year, while Rees will step down later this year. Most of the Indian top management that was a part of this decision is no longer employed with the 

Melting point
Given that lenders such as SBI, which account for 20% of group company Essar’s Steel debt, are in the picture, how StanChart will get out of this mess is unclear. In October 2013, ratings agency CARE downgraded Essar Steel to ‘default’, due to ongoing delays in servicing debt obligations. This was attributed to a weakened liquidity position on the back of continuing losses. Of Essar’s businesses, steel is the one that has been hit the worst, much in line with the global commodity cycle. Seshagiri Rao, joint MD and group CFO, JSW Steel, concedes that this is the worst phase for commodities that he has ever seen. “There is always an upside of three to four years in this business, followed by an equally difficult period. The big difference this time is that the epicentre of the crisis is China, which was never the case in the past. This makes it impossible for us to predict the outcome,” he says. All the large players in the steel industry made their investments on the assumption that prices would rise, or at least hold out. “The fundamental belief was that steel could be sold at $600 per tonne, while the price of iron ore was $100. Today, steel is being sold at less than $300, with $40 being the price for iron ore,” explains Rao. Unfortunately, most of the aforementioned investments were made at the peak of the commodity cycle, when producing 1 million tonne of steel entailed an outgo of $1 billion. “With an oversupply of 400 million tonne globally, the whole business model is looking unviable for most players,” Rao rues. As things stand, China has shut down 90 million tonne of capacity last year, with the possibility of a further 150 million tonne being shut down over the next few years. “China is exporting at any price and restricting imports from it is the only way forward. The whole process of adjustment for the steel industry should take two years at the very least,” Rao adds. 

In response to a questionnaire, a spokesperson for Essar stated, “The proceeds of this facility [loan from StanChart], with Essar Global’s own funds from StanChart, have been invested in creating state-of-the-art facilities in the steel, oil and gas, power, ports, shipping and projects businesses.” These assets, he stated, are newly built and offer significant growth potential. “Essar has a clear plan to repay the loans by selling stakes and the monetisation of certain assets. Towards this end, it has signed a non-binding term sheet with Rosneft [Russian oil major] to monetise a part of its shareholding in Essar Oil, and transactions of this nature will be used to pay Essar Global’s debt.” Media reports have suggested that StanChart is looking at selling Essar’s loans, although the opinion among bankers is that the foreign bank will need to shave off no less than 33% of its loan value for the deal to go through. Incidentally, according to reports, HDFC Bank has taken a 40% haircut on its Rs.550-crore exposure to Essar Steel by selling the loan to an ARC. If being the house lender to large groups brought in risk without adequate cover, the bank’s decision to back certain companies — diamond producers, small players in the infrastructure sector — added another layer of risk. Winsome Diamonds, for example. 

Diamonds to stones
It is dark and dingy on the fourth floor of Hermes House. As we ring the bell at the office of Winsome Diamonds and Jewellery, a man gingerly opens the door. It is past noon and he is quite groggy. “Are you from one of the banks,” he asks, nervously. Once the answer is in the negative, we are quickly ushered inside. The office is fairly large at about 1,500 sq ft and looks no different from any of the diamond units at Opera House, a south Mumbai locality that houses several players from the industry. The board outside still bears the name of Su-Raj Diamonds, which is how the company used to be known. There is no visible indication of work being carried out here and we are told that the place has been bought over by SRV Polishing. The new owner is a man called Mustafa and he shows up once a week, says our host. It is to this company that StanChart sanctioned a loan and is reportedly planning to write-off. In fact, StanChart is the lead bank in a consortium that features names such as Canara Bank and Punjab National Bank. Winsome’s promoter Jatin Mehta is said to be in Dubai and has remained inaccessible, with charges against him ranging from fund diversion to wilful default. None of the telephone numbers listed for the office work and neighbours say Mehta has not been seen in the building for at least four years now. StanChart’s exposure to the company stands at Rs.406 crore. A StanChart insider says the loan has been written off. 

The insider wryly speaks of poor levels of due diligence at the bank, which ensured that there was no rationale behind lending to a company like Winsome. “Starting 2008, decisions with respect to lending came from the top and nobody could really question their merit,” he says. It was around this time that the bank loaned Rs.400 crore through non-convertible debentures to Hyderabad-based Soma Enterprise, an infrastructure company, which again is a bad debt on the bank’s books. This debt was sanctioned much after ratings agency ICRA downgraded Soma to ‘D’, its lowest grade, on grounds of stretched liquidity, delays in meeting debt obligations and completing toll road projects. Since then, Soma has been referred to the corporate debt restructuring cell and its ratings have been suspended by ICRA following the absence of requisite information from the company. Another big miss at StanChart was in telecom. The bank’s decision to back Abu Dhabi-based Etisalat backfired after its telecom operation — a joint venture with India’s DB Group — got embroiled in controversy during the 2G spectrum auction in India. In early 2012, two years after commencing operations, Etisalat, which had a presence across 15 cellular circles and 17 lakh subscribers, decided to exit India. StanChart had loaned $300 million to Etisalat for this venture. The loan was made to Etisalat’s Indian affiliate, Etisalat DB, in which the foreign investor held a 45% stake. 

However, the Etisalat management, according to a Reuters report dated November 7, 2013, says the company had only given a letter of support to the venture, and that it had no legal obligation over the loan. At the time of going to press, Etisalat had not responded to Outlook Business’ questionnaire. Another such instance was the one where the bank lent $300 million to network services company GTL, of which $60 million, says the StanChart insider, has been written off. A part of the money was used to fund group company GTL Infrastructure’s buyout of Aircel’s telecom towers in 2010 for Rs.8,400 crore. This was followed by the government cancelling 122 telecom 2G licenses, including Aircel’s. This had a serious impact on GTL and the company went in for CDR. Manoj Tirodkar, GTL’s chairman, insists that his group has repaid Rs.6,000 crore to banks over the past five years. “We are committed to clearing every loan on our books,” he says. 

Winters, who used to run JP Morgan’s investment banking business before joining StanChart in February last year, is now very clear about the type of clients the bank wants to engage with in India. “If they [promoters] are transparent and direct with us and are doing everything but also protecting us, we will sit with those clients every time. If we have a client that is not transparent or has different interests that it is prioritising above ours, then we will be very aggressive,” he said during a media interaction. During this visit to India last year, Winters reportedly also met top honchos from other banks that have lent money to its biggest borrowers. A StanChart executive says that Winters won’t spare any effort to recover the money, primarily by working with other lenders. Given that the answer from one of its biggest borrowers, a few months ago, about its high quantum of debt reportedly was, “What debt? We consider that equity”, this is not going to be easy. 

When it comes to mistakes, StanChart has committed the whole laundry list — placing big bets on the beleaguered infrastructure space, concentrating huge amounts of debt on certain borrowers instead of spreading risks, backing unsecured loans to promoters, giving undue leeway to its M&A and corporate finance teams. Of course, it has several things working in its favour, from its strong brand equity to its branch network in a growing market like Asia. While the StanChart spokesperson did not reply to specific questions on the bank’s lending practices or if proper due diligence was conducted on the loans given, the emailed response did say, “We are in the middle of a significant transformation and this won’t be a short-term fix. Despite the challenging conditions, India continues to be a core franchise for the group. The group’s strategy, announced in November 2015, positioned us for the current macro environment with a successful $5 billion rights issue globally, tightened risk tolerances and expansion of our cost savings plan.” 

For now, chief among Daruwala’s reform steps could be reducing the bank’s exposure to stressed sectors and putting in place a better due diligence system. Thankfully, she brings with her a more traditional approach to wholesale banking, a business that she is exceedingly familiar with. Perhaps an increased focus on retail banking given its wide branch network could also be on the cards. But as things stand, a team of writers in London is said to be compiling and chronicling the bank’s history, dating all the way back to 1853. It is not known how much progress has been made on the book, but the one chapter that the authors will find interesting to pen will be the chequered history of the bank in India.