Banks speed up sanctioning of loans, companies picking up cautiously

Although banks have speed up sanctioning of loans but they are crying out as companies are not picking up even half the money. According to SS Ranjan, deputy managing director and CFO, State Bank of India, the nation’s largest lender, “Our sanctions grew by around Rs 60,000 crores in the last financial year. Of that undisbursed loans stand at about Rs 45,000 crores.” Thus bank has not started getting interest on three-fourths of the loans it had sanctioned last year.

Suresh Ganapathy, head of Macquarie Securities Group’s financial research team said, “Corporates are very cautious about capacity expansion due to which there is a lag in sanctions and disbursements.”

Bank of India is facing the similar problem, it had sanctioned loan of around Rs 48,000 crore by the end of March 31 this year.

M Narendra, executive director of India’s No. 4 lender said, “Our undisbursed sanctions are about Rs 25,000 crore. Projects are taking time to get implemented.” “We charged an average interest of 10% on what we disbursed.”

Even the private sector and smaller banks are facing the same problem.

Jaideep Iyer, president, financial management at Yes Bank informed that in the last financial year bank had sanctioned Rs 22,000 crore, which was 73% more than in fiscal 2009, but from this two-third or around Rs 15,000 crore, is still undisbursed.

Since in the last fiscal the credit growth was slow, net interest income (the difference between interests earned and interest paid) of banks had slowed down, informed Vaibhav Agrawal, vice-president-research, Angel Broking.

Last year loans sanctioned by banks, around third were for infrastructure projects, stated Indranil Sen Gupta and Dick Li, analysts with Bank of America-Merrill Lynch, in a report on March 25. For this year, they predict 35% rise in infrastructure loans. According to RBI data there has been growth of 42.3% in infrastructure loans between April 1, 2009, and February 26, 2010.

N Sivaraman, executive vice president (financial services), Larsen & Toubro pointed out, “In the first 12 months post sanction, only 20% to 30% of a loan gets disbursed because projects get caught up in various approvals. Usually a major part of disbursements happen after 18 to 30 months of sanction.”

According to E Sudhir Reddy, chairman & managing director, IVRCL Infrastructures & Projects, one of India’s biggest road builders it’s the nature of the beast. “If you take up NHAI (National Highways Authority of India) projects, they take a lot of time (to execute),” he explained.

Reddy quickly adds that it’s not because of poor execution. “Project executions have been fine,” he said.

At present IVRCL is working on three development projects, three road projects and one desalination plant.

Pradeep Singh, vice-chairman and managing director, IDFC Projects, another lender, have the same view. “There is usually a time lag and because there has been a significant increase in sanctions the gap is more pronounced this time,” Singh said.

IDFC Projects is currently developing a 1050 mw power project in Chhattisgarh, Madhya Pradesh.

According to some in the last quarter of last fiscal the banks speed up sanctioning of loans is a clear attempt to bulk up their loan book - called ‘window-dressing’.

“Most banks were showing loan growth of around 16%. But to ratchet this up, they went on a sanctions binge in the last quarter of the last fiscal. Not all of these were disbursed by the time the year ended,” said Abizer Diwanji, executive director and head of financial services at KPMG, the audit firm.

“Credit growth will gather pace primarily driven by infrastructure this year too,” Diwanji said.

As Indian economy is expected to grow at around 8%, therefore Reserve Bank of India has predicted a growth of around 20% in loans by the end of the current fiscal on March 31, 2011.

On the other hand analysts are expecting rise in non-infrastructure loan after September.

“Retail loans are already leading the turnaround in credit demand in a repeat of 2003-05. Anecdotes suggest the urban consumer is returning to borrow - especially, for housing - as confidence improves with better job prospects,” Sen Gupta and Li said in another note last week.

“We expect corporate loan demand to pick up in second half. Industrial credit had shown a lag even in the last upturn. Most banks have already reported an increase in loan sanctions. These should translate into higher disbursals as corporates gain better growth visibility,” they said.