Banks go slow on term loans

Retail borrowers preferred over corporate clients who bargain hard over rates.

The liquidity crunch has affected corporate term loans. Banks, particularly those in the public sector, are going slow in disbursing term loans and sanctioning fresh loans to companies till liquidity conditions improve.

"The resources for lending are limited, while claimants to credit are ample. Hence, banks are working on individual strategies to decide on the most profitable avenue for lending," a senior banker said. In other words, retail borrowers are getting preference over corporate clients, who bargain hard over interest rates.

Said Union Bank of India Chairman K Cherian Varghese, "Banks are finding the task of committing term loans for any new credit demand, especially from corporates, a challenge.

Resources are under pressure as the growth in deposits has lagged behind the rise in credit for two consecutive financial years."

The demand for corporate term loans would remain strong, but banks needed to have adequate resources to actively solicit new business, said another Mumbai-based banker.

"If the liquidity situation does not improve, we will have to rein in our credit growth," he added. Bankers also expect the rise in interest rates to somewhat dampen demand for loans.

Bank credit increased by Rs 3,46,329 crore year on year on March 3, 2006, whereas deposits grew only by Rs 2,90,048 crore. Five per cent of the deposits get locked as cash reserve ratio (CRR). Bankers have put the liquidity gap at Rs 1,00,000 crore. State Bank of India Chairman AK Purwar, while talking to reporters on Saturday said, "Liquidity is under pressure and the position is extremely fluid."

For SBI, the country's largest bank accounting for almost one-fourth of the banking industry along with its seven associate banks, disbursal of loans to top companies has been negative in the 11 months ended February 28, 2006.

"The SBI story has more or less mirrored in most banks, even though the contribution of top corporates might not be negative in some cases," a public sector bank official said.

The contribution of retail to loan growth in the case of SBI in the 11 months of 2005-06 was 27 per cent, of mid-corporates 33 per cent and of other SMEs another 20 per cent.

Several banks have seen negative to very low contribution of corporate loans to the growth in total advances portfolio compared to that of retail loans and advances to small and medium enterprises.