Tuesday, July 17, 2012

No Short Term Unsecured Loan to Achieve Lending Target

No short loans to companiess: Ministry of finance to banks

MUMBAI: In the last few months, central bankers - past and present - editorial writers and financial analysts have voiced their concerns about a string of finance ministry missives to 'micro-manage' state-owned banks. But the government - the largest shareholder in these institutions - is unruffled by the persistent criticism. 

In the latest directive, the ministry has told public sector lenders to refrain from giving collateral-free short-term loans to corporates. Such unsecured advances, better known as general purpose loans, have tenures of less than one year. 

With most banks grappling with sticky loans and restructured assets, the move is perceived as the government's effort to strengthen banks' loan books. A default or non-payment of a loan not backed by collateral can be more damaging as the lender has little recourse to salvage the lost money. 

Banks have to either phase out all such loans in the next six months or create collateral securities against the assets, according to the ministry communique dated July 16 to public sector bank chiefs. 

Short-terms loans constitute 5-7% of a bank's advance portfolio. In the absence of credit offtake, several banks give unsecured short-term loans to blue-chip clients. Typically, these loans are cleared at a short notice and bank managers approve disbursals through 'circular resolution' - a practice to obtain quick consent from directors and save the time required to convene board meetings. 

Ministry Seeks Details of Bad Loans 

But "in future", says the ministry's letter, "sanctions for short-term loans have to be placed before the board and cannot be done through circular resolution". Although the share of shortterm loans is not very significant, the ministry fears there may have been instances of companies borrowing from one bank to repay another bank, said a senior banker. "Also, there are instances where banks dress up books and show higher credit at the end of a quarter by luring companies with easy short-term funds," said the chairman of a large commercial bank on condition of anonymity. 

The ministry has told banks to share details of short-term loans classified as 'bad loan'. Each bank, as per the directive, has to frame a policy on unsecured loans and place it before its board for approval. The restriction, however, excludes investments in instruments like commercial papers and short-term bonds. 
The government's paranoia about loan portfolios of public sector banks stems from the rise in gross bad loansto 3.1% of total advances in 2011-12 from 2.31% a year ago. With more and more companies approaching banks to restructure debts, chances are a slice of such loans may have to be classified as non-performing assets that attract higher provisioning and eat into banks' capital. In the last two years, the government has infused Rs 32,000 crore in public sector banks to keep them afloat. The Corporate Debt Restructuring Cell has rejigged Rs 1,50,515-crore loans to soften the terms for 292 companies. 

In recent months, the ministry has instructed banks on the subject of board meeting discussions, directed them to cap bulk deposits at 15% of total deposits, and resist offering liberal debt restructuring packages to defaulting corporates. Banks have been told to categorise a loan account as 'bad' if the borrower is a defaulter with any other bank in the lending consortium. 

In the July 16 letter, the ministry has also said the scheme of joint lending arrangement should be applicable to all short-term loans. JLA, similar to a consortium arrangement, relates to loans above Rs 150 crore and involves more than one bank. Under the arrangement, all lenders are taken on board before a bank gives additional loans to a company or tweaks the loan agreement.

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