Mumbai: A section of the banking community fears that the Reserve Bank of India (RBI) may explore the possibility of adopting some form of credit control for bank loans to commodities in a bid to fight the rising inflation.
Inflation, as measured by the rise in wholesale prices, has been hovering above the 7% mark for a few weeks now, much above RBI’s comfort zone of 5%. The government has already taken a series of fiscal measures and RBI in mid-April raised the cash reserve that commercial banks keep with the Indian central bank in an effort soak up excess liquidity that stokes inflation.
Bankers say RBI may not go for a rate hike but “attack” certain segments through measures to dampen the credit flow. Last year, it had raised banks’ capital and provision requirement for certain segments of retail loans and made money dearer to rein in the runaway credit growth.
Executives in the steel and cement industry, however, do not expect any measures that will make borrowing difficult for companies, and they say the current inflationary trend in their sectors is primarily supply driven. Any disincentives on borrowings would further add to their costs and delay the expansion plans as well, they add.
Banks had aggressively followed selective control norms in the 1970s for foodgrains such as rice and wheat as well as edible oil and sugar to discourage hoarding by traders and other intermediaries. This was done by raising the margin requirement and limiting banks’ exposure to such loans.
In banking parlance, margin is a collateral that a borrower has to offer to the lender to cover credit risk. Normally, banks insist on a 25% margin for working capital loans. This means, if a firm or a trader needs to borrow Rs100 crore, it must have Rs25 crore of its own funds. A higher margin will discourage a borrower to go for higher bank borrowing.
“Banks can also impose higher interest rates on lending against commodities to companies,” says a senior executive of a public sector bank who does not want to be named. Besides, they can deny general purpose loans to commodity firms. This can be done if the central bank feels commodity firms are building up large-scale inventories to artificially raise the price.
General purpose loans are those loans where banks do not specify the end use of money borrowed.
Working capital loans are given to a company to help it run day-to-day operations such as sourcing raw material and semi-finished goods, maintaining inventory and ensuring cash flow against receivables.
“Banks can also ask firms to cut their inventory level to ensure supply of commodities,” says another banker who also does not want to be identified.
“I personally don’t feel that RBI would provide any disincentives for credit to the steel sector. It would be a highly pro-inflationary measure, and a very unfortunate surprise, if the credit policy does something to this effect,” says Robin Banerjee, director, finance, Essar Steel Ltd.
“If the government decides to go ahead with selective credit control measures, it will seriously hamper the addition of new capacities that are planned in the steel sector. It will also affect our day-to-day operations, especially with the prices of raw materials going up considerably, we need more working capital,” adds Sheshagiri Rao, director, finance, JSW Steel Ltd.
According to Essar Steel’s Banerjee, if the margin requirement goes up, the cost of borrowing will increase, thus putting more cost pressures on the steel makers.
“If these measures come into place, it will hurt the smaller companies more than the bigger ones, as they are the ones who depend on working capital loans,” Banerjee adds.
Steel production in India is growing at 10%, while the growth in domestic consumption is around 13%. Steel makers have plans to add 50 million tonnes (mt) of capacity over the next four years, but the expansion plans have been facing delays, primarily due to the non-availability of raw material linkages, particularly iron ore.
Cement companies have also announced considerable expansion plans but they have not been able to move fast with their plans on account of problems relating to land acquisition and sourcing of equipment, obtaining mining leases from the state governments, and rising input costs. In 2007-08, cement firms added 17mt of capacity. In April 2007, the industry had announced a capacity addition of 100mt over the next three years.
Commodities are one of the “sensitive” sectors where banks’ exposure is always under the lens of the regulator. In fiscal 2007, Indian banks made total commodities lending of Rs2,206 crore, about 56% higher than what they had lent in the previous year. However, it was much lower than the banks’ exposure to real estate market (Rs3.71 trillion) and capital market (Rs30,637 crore) in 2007.