http://www.infosys.com/finacle 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.

1. Should Banks Worry About the Muscle
Power of Their Corporate Clients?
Universal Banking Solution System Integration Consulting Business Process Outsourcing

2. Over the last 10 years, the lifestyle of the movement. Should that happen, it could threaten
average 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 nowhere
is this more evident than in the burgeoning Many large organizations in the country, including
portfolio of luxury class loans of large banks. the public sector banks, have encouraged the
The mindset seems to have changed from that concept of an employee-run thrift and credit
of ‘save-to-spend’ to one of ‘spend-to-save’. society. These societies collect a small monthly
contribution from member employees towards
In the early 2000s, private sector banks a thrift or savings fund and pay them a
dominated the auto finance market, with Citibank reasonable interest / dividend in return. The
leading the pack. However, ICICI Bank was large pool of funds collected in this manner is
quick to spot the opportunity and took an made available – as an unsecured consumption
aggressive selling approach to cut down loan or a medium term auto loan – to needy
Citibank’s share from 27% to 8% within a few employees at discounted rates. Many of these
years. It’s own share of the auto finance market self-sustaining vehicles have been running
rose 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 large
number of public sector institutions, had also companies mentioned earlier. With bank loans
awakened to the opportunity. Leading public being available at competitive rates and the
sector banks like State Bank of India, Punjab establishment of bank branches and special
National Bank, Bank of Baroda, Bank of India, counters within its premises, the company had
Canara Bank, Syndicate Bank and Union Bank decided sometime last year to stop all employee
all 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 loans
balance sheet and profit in the years 2009 and outstanding on its books was to the tune of
2010 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 employees
The luxury consumption market has benefited of this company can easily generate a similar
from the dividends of the demographic transition surplus amongst themselves and thereby reduce
that the country is going through. On the flip their dependence on the bank.
side, the same demographic dividend could
also lead to catastrophic consequences for the If each of its 140,000 employees were to
new consumption /luxury loan market; it is just contribute Rs. 1000/- per month from their
that there has been no movement yet in this salary towards this scheme, the collection in
direction. Because funds are still available – the very first month itself would be to the tune
albeit on stiff terms – customers, particularly of Rs.140 million. The point to note is that
those belonging to Generation Y, have not put this contribution is just 3% of the monthly
their minds to finding alternative or cheaper compensation of the lowest paid cadre of this
sources of funding. company and the actual voluntary contribution
could be much higher.
The economic boom has created some very
large Indian companies like Reliance, Infosys, • Within 10 months, the contributions would
Wipro, 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 amount
of multinational organizations like IBM and at one time.
Accenture. Most of these companies have an
employee strength of 100,000 and more, • With every month’s contribution, this credit
endowing them with great muscle power. These society will be able to finance more than
employees are collectively sitting on a huge pile 400 4-wheeler auto loans or more than
of surplus funds that could be utilized to start a 2000 2-wheeler auto loans. And by the 10th
collaborative self-service cooperative financing month, the installments would themselves
Should Banks Worry About the Muscle
Power of Their Corporate Clients

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.
Reference
So, shouldn’t banks be wary of such large
conglomerates? If, as the above example shows, 1. //business.mapsofindia.com/finance/top-
a single cooperative fund can equal 10% of a auto-finance-companies-in-india.html
large bank’s auto loan portfolio within one year,
imagine what ten of them can do. 2. //www.rediff.com/business/slide-show/slide-
show-1-tech-infosys-halts-loan-schemes-for-
And what’s in it for these large companies? employees/20110131.htm
Why should they embark upon such an
activity, which is clearly outside their area of
expertise? What do they gain by stepping into
banking territory? Author
Mahesh R.
As we know, these companies’ human resources
Senior Delivery Manager – Finacle
are their most critical asset. They spend large
Infosys
sums to first acquire and then retain talent. An
Should Banks Worry About the Muscle
Power of Their Corporate Clients