Firms to provide data on fund use

RBI asks banks to seek affidavits from companies.

The Reserve Bank of India (RBI) has asked all banks to seek from companies either an affidavit or an undertaking certifying the end-use of working capital during the disbursement of funds.

The banking regulator is concerned that a part of the working capital loans availed by companies may have been finding its way to the stock and real estate markets. The directive aims at checking the flow of funds into speculative activities.

Besides, the RBI also wants to rein in the phenomenal credit growth currently witnessed by the banking sector.

The non-food credit growth has been over 30 per cent in the last two years (2004-05 and 2005-06), leading to over a 100 per cent credit-deposit ratio in the banking system. The RBI, in its annual credit policy, has projected 20 per cent credit growth for 2006-07.

"The regulator has been monitoring the end use of funds all along. However, it is not easy to detect the flow of specific fund to any specific sector as money is fungible. By seeking an undertaking in advance, the RBI is probably trying to ensure that the banking system is not used for speculative activities," said a banking sector analyst.

The RBI has noted an upsurge in the working capital loans. Companies are citing interest rate uncertainties as the reason for availing large working capital loans to keep costs down in the event of interest rates rising further. Banks have been lending to the corporate sector both in domestic rupee and foreign currency.

The RBI's anxiety about personal loans being used for investment in equities had led to the central bank raising the risk weight and increasing the general provisioning on exposures to the real estate and equity markets, in its 2006-07 annual policy. The banking sector has been witnessing a substantial increase in retail loans, including personal loans.

The informal directive to banks aims at checking the scope of funds flowing into sensitive sectors through the corporate sector.