Cloud over corporate loans

Central bank fears corporate credit is finding its way to the bourses.

Some public sector banks, concerned that the money lent to corporates could find its way into the stock market, are asking branches to follow stricter due diligence in lending to corporates.

Some banks have clamped down on general purpose loans to corporates. On other loans, banks are insisting that payments on behalf of the corporates be made directly.

"Whatever is happening in the stock markets has highlighted the need for monitoring the end use more diligently now. The end use of funds is of prime concern to us. We do not want our money to find its way into the stock market," said a senior public sector bank executive.

The benchmark Bombay Stock Exchange (BSE) Sensex has already marked 13 record highs in 16 trading sessions. The Sensex ended at a new peak of over 15,732 points today. Foreign institutional investors have been net buyers in July.

Some banks are looking to avoid making fresh disbursements where it is not possible to ascertain the end use of funds. These banks are looking to cut down on loans advanced for general purpose.

"We are trying to avoid or reduce giving general purpose loans. We are giving loans where it is possible to verify the end use of funds. We are sensitising branches and zones on how to monitor the end use," said A D Parulkar, executive director, Bank of India.

Borrowers are required to state the purpose for which they are taking the loan and also submit an auditor's certificate at the time of availing of credit.

"However, a mere declaration by borrower or submitting a chartered accountant's certificate is not enough. We are also looking at direct remittance or payments on behalf of corporates," said the senior exectuive.

Where banks lend as a part of a consortium, the lead bank is asked to monitor the end use of the funds. Last month, the practice of banks providing short-term, unsecured loans to corporates at low interest rates had come under the Reserve Bank of India (RBI) scanner.

The RBI had asked banks to furnish information on short-term, unsecured loans disbursed at rates below the prime lending rates (PLRs) after realising that such low-cost lending was replacing working capital loans.

The RBI was concerned that some banks, driven by their zest to increase portfolio sizes, had extended short-term loans without adequate due diligence on the end use.

The central bank is also worried that lax monitoring and absence of collaterals could lead to a decline in the asset quality during tough times.