Banks taking time for sanctioning loans, companies go for commercial paper

Banks are taking time to sanction loans. In the last one and half months the actual disbursement of loans have been very low, whether it is for short-term working capital or long term loans. The reason may be the borrowers with working capital requirements have found commercial paper as an alternate source for funding thus they are not using their entire sanctioned bank limits.

Regarding sanctioning of term loans, banks are taking long time to disburse loan as the bulk of sanctioned loans will be used for long-term infrastructure projects, unlike what used to be in the past. As a result this year in October, the banks lend around Rs 29,000 crore, the first month of the professed busy credit season, as against huge amount of Rs 1 lakh crore in the corresponding month of 2008.

However it is not possible to determine the size of unused sanctioned loans, but bankers presume that the total sanctioned loans to companies collectively can be estimated to Rs 2 lakh crore. According to a top banker, if the banks lend 10-15% of their respective sanctioned limits, the credit can pick up considerably.

Till then, banks are greatly dependent on retail credit loans to small and medium enterprises and agricultural loan disbursement for registering credit growth.

As for corporates with working capital requirements, commercial paper (CP) has become the most preferred fund raising instrument. Fund picked up via CPs for six months helps company to get good credit history around 5% a year, as against to 8-9% interest on bank loans. Thus it is clear that anybody can use the CP route for funds instead of going for working capital loans from banks, informed IDBI Gilts head of tresury S Raghavan.

Basically banks are facing the heat because of two reasons. In addition to their latest keenness for instruments like CPs or external commercial borrowings (ECB), the volume of the sanctioned bank term loans are not being disbursed due to higher growth period.

There is major gap between sanctioned loans and actual disbursement. Punjab National Bank chairman and managing director KR Kamath pointed out in case of term loans majority are taken for infrastructure projects, which generally have higher growth.

Whatever the reason may be, clearly fall in credit disbursement has pushed banks to their back foot. Now many of the lenders have to lend at rates which is below their cost of funds, due to this pressure on their interest rate margin is also increasing. Thus it is better to organize fund somewhere rather than to keep it idle, said a top official with a Mumbai-based public sector bank. There has been significant growth in country’s industrial output. Also banks credit growth has been slow. Thus it clearly indicates that companies are going for alternative sources of funds for investments or for their working capital requirement, Dena Bank executive director Bhaskar Sen pointed out.

In the beginning companies use their own resources to build a project, or erect a factory, in order to minimize the cost-carry. Due to this the growth period for bank loan disbursement gets longer, said Allahabad Bank executive director JP Dua.