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Banks begin to tighten loan taps for corporates

Banks begin to tighten loan taps for corporates

Discuss Banks begin to tighten loan taps for corporates within the Articles !! forums, part of the Mirror View - Ebooks Links & Miscellenous Reading Material category; Banks begin to tighten loan taps for corporates MUMBAI/NEW DELHI: Amid an unprecedented liquidity squeeze, large banks, including the country’s ...

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Rahul Parab
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rahul_parab2006
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Post Banks begin to tighten loan taps for corporates - October 4th, 2008

Banks begin to tighten loan taps for corporates


MUMBAI/NEW DELHI: Amid an unprecedented liquidity squeeze, large banks, including the country’s biggest lender State Bank of India, are holding b

ack short-term loans to corporates. Some banks are understood to have taken a decision that short-term loans, primarily working capital, will be frozen at Friday’s level.

So, if a corporate has a drawing power of Rs 150 crore and the bank’s loan outstanding to the company is Rs 100 crore, the balance Rs 50 crore will not be disbursed immediately. Under normal circumstances, the company could have automatically availed of the full drawing power limit; but now, it will have to wait a while till the liquidity situation eases a little.

According to industry circles, several banks are also pursuing this policy to tide over the liquidity crunch. SBI, sources said, will also refrain from discounting non-customer bills. This means that if a trader having opened a letter of credit with another bank, submits a bill to SBI, the latter will not discount it.

Many banks have also decided to scrap festival loan offers. With RBI asking banks to go slow on new loans, large banks have decided not to come out with festival offers on consumer durable, home and other retail loans.

Almost every year, the October-November festival season sees banks announcing special interest rates for home and consumer loans, often in association with builders or manufacturers.

RBI has also questioned banks on the measures being taken to bring down the loan growth.

The central bank is keen to reduce loan growth, because the credit-deposit ratio continues to be very high at 73.16%, despite signals from RBI to trim lending. Although the market is facing an extreme liquidity crunch with banks borrowing over Rs 90,000 crore and inter-bank rates jumping to 16%, credit growth continues to be strong.

Given this situation, the central bank has sent a strong message to banks that it is not going to be business as usual. Until early this year, banks have been supporting loan growth by borrowing from other banks. RBI has said that banks should only lend the money that they can raise as deposits, as market borrowing by banks is typically short-term and can land the banks in a liquidity squeeze.

The central bank has also cautioned some banks from using their rupee resources to purchase foreign exchange for onward lending through their foreign branches. This comes in the light of the finding that some banks have been crediting funds to overseas branches for extending loans to fund global businesses of Indian companies which are hit by the global credit crunch.

RBI has also cautioned banks that some of the liquidity availed of by banks in earlier months — bulk deposits from mutual funds and lines of credit from foreign banks — will no longer be available. RBI has sought bank-by-bank positions to see whether credit growth is on the back of sustainable resources such as deposits.

Banks have informed RBI that their loan growth is being driven by genuine demand from corporates and small and medium enterprises. Some of the larger banks are extending large loans to oil companies, who are facing a resource crunch because of rising cost of the dollar.

The credit-deposit ratio is a clear sign that banks are overleveraged. Currently, for every Rs 100 that banks raise as deposits, Rs 25 has to be set aside for investment in government securities, while another Rs 9 has to be parked with RBI to meet the cash reserve ratio guidelines. So, even if banks were to use their own capital and deposits, they would be able to achieve a credit-deposit ratio of only around 70%.
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