Are you reassured now?

“Sub-prime rates in India are given to the highest rated industrial group… You and I don’t get sub-prime rates. Somebody like NTPC may get a sub-prime rate or Tatas… I am only speculating.

That’s P Chidambaram, our smart Finance Minister reassuring his countrymen that the sub-prime wreckage won’t hurt India much.

Except of course, that sub-prime rates are not below the Prime Lending rates, but above.

Subprime lending, also called “B-Paper”, “near-prime” or “second chance” lending, is a general term that refers to the practice of making loans to borrowers who do not qualify for market interest rates because of problems with their credit history. Subprime loans or mortgages are risky for both creditors and debtors because of the combination of high interest rates, bad credit history, and murky financial situations often associated with subprime applicants. A subprime loan is one that is offered at a rate higher than A-paper loans due to the increased risk. (source)

To be fair to Chids, I too was fooled by the “sub” in sub-prime till my brother explained to me that what was “sub” about it was not the rate, but the quality of the borrowers. But I am a mere blogger, not the country’s finance minister.

9 thoughts on “Are you reassured now?

  1. I have a feeling he was misquoted. Or partially.

    And, he isn’t wrong in saying we don’t have sub-prime rates in India when an individual borrows. We don’t even have a standardized credit rating. Maybe someone from the sector should tell us, if big corporations in India are indeed allowed to borrow at sub-prime rates for short term, high risk projects. I assume it is unlikely, given they have access to the world’s debt instruments. But may be, just may be.

    Once upon a time, I remember, small industries in India were lent to at rates slightly higher — is that still in practice?

  2. Nilu,

    wholesale banks use lending as a loss leader to cross-sell fee based advisory and transaction banking systems. Small industries have no use for these, and only use debt. So their debt will be priced to make a profit. Yes, their rates will be higher.

  3. Nilu, you are utterly confused. The Prime Lending Rate is theoretically, the best rate that the bank offers to its borrowers. You have to be AAA+ or whatever the highest rating is to get the rate. In practice, a few rock-solid companies like the Tatas and NTPC can indeed get a better rate than the PLR. This is what our esteemed finance minister is referring to when he says that “Sub-prime rates in India are given to the highest rated industrial group… ” But this is NOT “sub-prime”.

    If you are a company with a lower credit rating then you will naturally pay a higher interest rate. That is normal practice. No banking system can offer the same rate to everyone.

    But yes, it is true that in India you don’t have sub-prime lending in *retail*, and that is what is causing the current mini-crisis in the US. But I don’t think Chids meant “you and I” to refer to retail borrowers. In context, he clearly means “people with a lower rating than the Tatas”.

    But there is one more reason why the statement is retarded to begin with. His reassurance is flat out false. The subprime wreckage is affecting India because American fund managers are withdrawing funds from India. It has nothing to do with whether subprime lending exists in India or not

  4. Ravi,

    most large corporates and not just a few rock-solid ones get rates below the PLR. PLR is a very abused concept for the past few years.

    Also, Fullerton India is supposed to be targetting subprime borrowers, though I’m not sure how far they have succeeded.

    Also, if you’re ICICI or Indiabulls and have, ahem, a happy-go-lucky credit policy a large number of your customers will be subprime on a realistic evaluation. That, however is the subject of another rant.

    And yes, agreer on the retardation.

  5. That makes Chidambaram even more wrong. He is not aware of what is happening in India. So it is too much to expect him to know the definition of subprime.

    About Fullerton India… is it targeting retail or corporate customers?

    And don’t ICRA and Crisil ratings have something to do with the rates corporates are charged?

    How is ICICI hiding its NPAs?

  6. Fullerton is doing retail personal loans.

    Yes, CRISIL ratings will be a factor in corporate lending. But that won’t change the loss-leader strategy – just how much loss you’re willing to bear. And SMEs won’t get rated.

    It’s easy to hide NPAs when you’re growing your asset book. It takes six months for a loan to be classified non-performing. So as long as you keep growing your loans the ratio of NPAs would remain low.

  7. OK, Aadisht, the point where Ravikiran and I seem to understand this differently is this: I somehow think, the rates, sub-prime or otherwise, are decided by the risk levels of the project for which the loan is being borrowed. Ravikiran seems to think the rating of the parent company is the biggest criterion. Please throw light.

    Or, I still don’t understand what Ravikiran says.

  8. Both are factored into the pricing. What I was trying to communicate was that debt might actually be priced below cost for many borrowers just to get a relationship and cross-sell more lucrative products/ advisory.

  9. Ah… I didn’t realise that this was causing confusion to you. Ratings themselves are a supposed reflection of the risk that the company will default. Of course, there are other risks and I fully expect banks to take that into account while determining the rates.

    Are you still confused about where Chidambaram got it wrong or has the confusion moved elsewhere?

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