Mumbai: State-owned banks have almost stopped deciding on loan disbursements because most bankers are scared to take calls on these in the wake of ongoing investigations by federal agencies into loans given by banks to some realtors and telecom operators.
Some banks have stopped processing loans, especially to real estate firms and small and medium enterprises, or SMEs.
The fear among bankers is palpable.
“Who wants to take unnecessary risks when everybody is after your life and looking to find fault?” asked a junior credit officer at a state-owned bank in Mumbai.
India’s apex court has recently ordered the Central Bureau of Investigation (CBI) to probe loans given to companies against their telecom licences. State Bank of India (SBI) has given Rs 10,000 crore to four telecom companies and bank officials maintain that there is no wrongdoing in the loan sanctions and all rules were adhered to while disbursing them.
One SBI official said it’s “demoralizing” when commercial decisions are scrutinized and “this is affecting the credit appraisal process”.
CBI also recently busted a bribes-for-loans racket involving bank officials and realty firms, forcing banks to step up caution while lending to the sector.
Financial consultants and intermediaries who procure loans for clients are concerned with the recent developments. “Every real estate proposal is looked at with suspicion. It’s unfair,” said a financial consultant whose firm is actively involved in procuring loans for real estate developers. “When we’re going with a credit proposal, bankers are not even talking to us properly.”
The consultant did not want her name or her company’s name to appear in media as she fears this would spoil the firm’s relationship with bankers.
Bankers, too, were not willing to be quoted in the story given the sensitivity of the issue. Mint spoke to at least half a dozen senior bankers and all acknowledged that they are going extremely slow in sanctioning loans even though there is officially no freeze on loans.
The financial consultant mentioned above complained that some banks have told her they won’t entertain new proposals before the start of the next fiscal in April.
Analysts said that one fallout of the ongoing crisis could be that bankers will start looking for customers who need money themselves instead of depending on intermediaries.
“It is a momentary relapse and a blessing in disguise,” said Suresh Ganapathy, head of financial research at Macquarie Capital Securities, the investment banking arm of Australia-based Macquarie Group. “From now on, credit appraisal will be robust, banks will be cautious and there will be good quality lending.”
Bankers said they are not taking any drastic measures that could jeopardize firms’ expansion plans or working capital needs but admitted that they are “more circumspect”.
“There’s no issue for big corporations and credit disbursal will continue like before, but we are Rs.on guard’ for any corporate loans,” the chairman of a large public sector bank said.
Most state-run banks have either stopped or sharply reduced corporate loan disbursals to realtors and are now opting only for the project-finance route to ensure that developers do not divert bank loans away from the original purpose.
Top officials of four state-run banks said they would now make end-use certificates compulsory for developers before giving any loans to make sure the amount is not misused.
Typically, developers use corporate loans to meet different requirements such as taking care of temporary cash mismatches, but analysts said many companies divert this cash to other activities such as land purchase and funding of other projects.
The chairman of a public sector bank based in north India said his bank has taken a decision to “slowly withdraw” from the business of giving corporate loans to realty firms, taking into account the risk of builders routing the money to non-stated activities.
Banks that have now limited their exposure to realty firms only through project-based financing include Punjab National Bank, Union Bank of India, UCO Bank, United Bank of India and IDBI Bank Ltd.
“We’ve stopped giving short-term corporate loans for companies including those in the real estate sector. The loans will now be given only for specific projects,” UCO bank CMD Arun Kaul said.
United Bank of India CMD Bhaskar Sen said corporate loans are unsecured where the end-use is very difficult to monitor. “We will take up proposals only on a case-to-case basis and give loans only for projects where the end-use is clear.”
According to Pranay Vakil, chairman of international property consultant Knight Frank India Pvt. Ltd, banks typically extend corporate loans to realtors for three months to a year and interest rates vary between 11% and 15%. In case of project loans, the tenure depends on the period of project while the interest rate is slightly lower than rates on corporate advances.
Some economists see the brighter side of the recent developments. “It will only lead to improved transparency and robust credit appraisal process for banks. If certain banks’ appraisal processes are not strong, they will become more cautious. It is going to help India in the long run,” said Bank of Baroda chief economist Rupa Rege Nitsure.
Canara Bank’s chief economist Manoranjan Sharma said risks associated with an individual’s lack of integrity are always present in the system and added that these risks are now coming to the fore because of increased transparency.
“We should realize that our banking system has emerged unscathed from the financial crisis and these are stray cases of individual bribery. We should not blow it out of proportion,” said Union Bank chairman M.V. Nair.