Union Bank gets selective on loans

Cuts loan growth down to 20 per cent.

Rising costs of funds and pressure on margins have forced the Union Bank of India to be selective in lending, especially to long gestation infrastructure projects.

As a consequence, the bank has also reworked (read cut) its loan growth target for 2006-07 to 20 per cent from its earlier estimate of 25 per cent.

Though there is no slowdown in demand for credit, the bank does not want to lend just for the sake of growing its loan book. "We will like to protect margins for better bottom line", executive director R S Reddy told reporters after launching a new deposit scheme.

The bank will be selective in lending to big infrastructure projects. Some of them (projects) seek lower interest rate that does not take into risk premium for long term exposure. Besides there is also issue of asset liability mismatch, he said.

Infrastructure projects have gestation period of over 10-15 years, while most bank deposits have maturity of much less than 10 years. Union Bank's outstanding infrastructure loan portfolio stood at Rs 5,900 crore, little less than 10 per cent of total advances as on September 30, 2006.

All commercial banks, including Union Bank, have seen pressure on their costs owing to the upward revision in deposit rates to raise resources. Union Bank has raised hiked the interest rate on term deposits by at least 75 basis points in the present financial year and has raised the prime lending rate by 100 basis points in three doses.

The bank will need to raise resources in excess of Rs 15,000 crore in January-March 2006 to reach target of over Rs 94,000 crore. The bank has seen a flat growth in deposits year on year basis, while it is 4 per cent since April 2006.

The loan growth stood at 29.36 per cent by end of September 30, 2006.