Axe falls on short-term loans

LIQUIDITY CRISIS WORSENS

Some banks decide not to roll over short-term loans; others will do it only at higher interest.

The tight liquidity conditions have kept some banks from rolling over existing short-term loans to companies, especially public sector undertakings, once these loans mature.

Such banks, including the country’s largest bank, State Bank of India, have decided to reduce the flow of loans with tenure of up to 12 months and instead focus on sanctioned credit limits.

During the last 15 days, there has been intense pressure on banks’ resource management. At the same time, the cost of deposits has also shot up in the current quarter.

“This has forced banks to change the way they deal with the short-term credit business,” said the head of corporate credit at a large Mumbai-based public sector bank.

When there was surplus cash in the system, banks were offering short-duration loans (30-60 days) at rates in the range of 7-9 per cent. These rates were lower than what they charged for sanctioned credit lines.
 

TAP RUNS DRY

* Banks are under pressure to manage resources judiciously

* Cost of deposits has shot up this quarter

* Liquidity has tightened because of advance tax installments

* Companies have been found using short-term loans for interest arbitrage

* Global financial meltdown and economic uncertainty has made banks cautious

While some money was used for business operations, a part of these funds was parked in short-duration deposits with banks, which offered attractive rates of up to 10-12 per cent. These companies may tell an impact on their treasury income as the possibility of this interest arbitrage is now lower.

In the last two weeks, liquidity has remained tight as companies have withdrawn money to pay the second installment of advance tax. In addition, banks are being increasingly cautious in fresh lending due to the global financial turmoil and economic uncertainty.

“Clients, especially public sector companies, have been asked to pay up on the due date and there will be no rollover,” said a top official of a mid-sized bank.

There are some banks which have agreed to roll over the debt on maturity but at a higher rate, factoring in the increase in the cost of funds. This is supposed to act as a deterrent for companies to avail of short-term loans.

However, given the tight liquidity conditions and the concern for protecting margins, which are under squeeze due to an increase in the cost of funds, banks are finding takers for loans even at higher rates.

In addition, a senior State Bank of India executive said that banks have gone a step further and are insisting on using the existing sanctioned credit limits for meeting fund requirements.