BANKS TOLD TO EXERCISE CAUTION IN SHORT-TERM, UNSECURED LOANS TO PSUS, LARGE COMPANIES

The Finance Ministry has thrown a wet blanket on public sector banks' tendency to ‘accommodate' public sector undertakings and large companies by giving them short-term, unsecured loans.

The Ministry has asked these banks to desist from giving short-term (up to one year), unsecured loans outside the consortium arrangement.

In the run up to the close of the financial year, public sector banks are often inclined to extend such short-term loans to show business growth.

A short-term loan given outside a consortium is considered a win-win for both the bank and the corporate.

While the bank can show growth in its loan book towards the end of the financial year, the corporate gets the short-term loan cheaper than the interest rate on working capital loans decided by its consortium of banks, opine bankers.

A corporate, depending on its credit rating, can get a short-term loan about 50-100 basis points cheaper than a working capital loan, explained a senior public sector bank official.

FEAR OF LOANS TURNING BAD

With the global and domestic economic climate turning gloomy, bankers say there is a lurking fear that short-term, unsecured loans could turn sour. If these loans become non-performing, banks will not have any assets to make recoveries.

Apparently, the Ministry does not want banks to take any chances even if the clients are PSUs. In this regard, bankers cite their ‘experience' with the national carrier, Air India.

Further, they pointed out that in some cases that have been referred to the Corporate Debt Restructuring Cell (promoted by banks), corporates were found to be funding capital expenditure with short-term loans.

In 2011, short-term loans and advances (up to one year maturity) accounted for 36 per cent of PSBs' total loans and advances, as per the Reserve Bank of India data.

In the case of other categories of banks — new private sector banks (short-term loans accounted for 36.3 per cent of total loans and advances), old private sector banks (41.9 per cent) and foreign banks (68.1 per cent) — the proportion of short-term loans and advances was much higher.

The Government is the majority stakeholder (holds between 55 and 80 per cent stake) in the 20 nationalised banks and State Bank of India.

These 21 banks and the five associate banks of SBI (together classified as public sector banks) collectively account for 74 per cent of the total bank credit in the country.

SOURCE: http://www.thehindubusinessline.com/industry-and-economy/banking/article3223413.ece