Unused loans to cost firms dear

Banks plan to charge a levy on unutilised portion of credit.

Companies from now on will have to pay a price for unused term loans sanctioned by banks. Banks are working towards incorporating in their loan agreements clauses that would allow them to levy a charge on companies for not utilising the entire loan amount sanctioned to them.

Alternatively, if a company is not willing to pay a charge, banks will retain the right to revoke the unutilised portion of the sanctioned loans. This will form a part of the new terms of sanction for lending to companies.

From this year, banks are required to set aside capital for unused portion of loans under the new capital adequacy guidelines. So far, only amount of loans drawn attracted capital adequacy norms.

Companies avail of the sanctioned loan in phases depending on their needs. Cash-rich companies often do not draw the entire loans sanctioned. However, the unused amounts are included in calculating a banks total exposure to a company.

"We are taking some steps to ensure we are unnecessarily not paying a charge. There will be a provision in the sanction letter or in the loan agreement with the corporate that if the limits are not drawn as per the drawal schedule, the limits will be considered cancelled," said a senior official of a Mumbai-based public sector bank.

For companies that want banks to continue with their committed credit limits, banks would levy a charge on the undrawn portion of the loan.

Banks are likely to levy a commitment charge of 50-100 basis points on the undrawn loan amount, which would translate into a Rs 5,000-Rs 10,000 charge for every Rs 1 lakh of undrawn loan. One basis point is one-hundredth of a percentage point.

Banks already levy a commitment charge on companies for drawing less than 70-80 per cent of cash credit facilities committed to them. These working capital loans come up for renewal every year. Now, in the case of term loans also, which are drawn over 3-5 years, banks would impose a commitment charge.

The commitment charge is meant to cover the cost of capital which banks would have to allocate for the undrawn loan amounts, under the revised capital adequacy framework, popularly known as Basel-II. If a company draws Rs 400 crore of the sanctioned Rs 500 crore loan, the lender would have to provide capital for 20 per cent of the undrawn amount (or Rs 20 crore) if the residual term of the sanctioned credit is up to one year.

Applying a risk weight of 100 per cent, as applicable to a BBB-rated corporate, the bank will have to provide an additional Rs 1.8 crore of capital. If the residual maturity of a loan is more than one year, then 50 per cent of the undrawn amount would have to be considered for calculating capital required to be allocated.

All banks will have to do this. So far we were not mandatorily charging. This could be in the sanctioned terms and conditions or in the approval note sent with the sanction letter, said the executive director of another public sector bank.

Banks have in the past desisted from levying any commitment charge on top-rated companies despite having a provision to do so, for fear of losing the loan account to another bank. There will be a period of adjustment.

There would be better appreciation by large corporates of the banks' situation. If there is a Rs 100 crore limit lying unutilised, I am earning zero on the loan account (as) I have to provide capital, said the official.

While the new terms would be incorporated in the new loan agreements, for existing loans, banks are asking companies to reassess if they really require the sanctioned limits. For the existing contracts, we will take them up with the clients. They will have to agree to one of these options.

If they do not agree, they can withdraw and go to another bank, said a senior banker. The head of corporate credit of the Mumbai-based public sector bank said, "We are seeking legal advice as to what to do about the existing contracts?"