You are here: Home » Finance » News » Others
Business Standard

Commitment charges are back as sanction-disbursement gap rises

Manojit Saha & Sidhartha  |  Mumbai 

With sanctioned credit lines going abegging, banks take corrective action.

With the gap between loan sanctions and disbursal on the rise, public sector players that control nearly 75 per cent of the market are back to levying

While a borrower seeks an approval for a loan, it has to provide a schedule for disbursal. Increasingly, companies are not adhering to the schedule as they are flush with funds, raised through non-bank channels, or because of deferred expansion. were now levying a commitment fee of up to 100 basis points of the sanctioned amount in case a company failed to avail the credit facility, several bankers said.

While commitment fee was levied in the past too, banks had dropped the levy during the boom years as they competed against each other to offer cheaper loans.

“There is no choice as we have to set aside capital, the moment we sanction a loan,” said an executive of

has dropped to a 10-year low of 10.5 per cent in the year up to December 4 as companies are not using the sanctioned facilities.

“Because liquidity is expected to tighten, we are levying a commitment fee which is up to 75 basis points of the loan amount,” said a bank chief. He said the move was also aimed at stopping companies for going shopping for the best bargain by using a sanction letter. “The moment someone has to pay a commitment fee, the chances of shopping are reduced,” the chairman said.

But banks also said it was difficult to levy the fee on large companies. “We are levying it wherever possible. Other banks had spoiled the market by removing it from standard terms and conditions. It is a business call. Banks charge the fee wherever there is scope,” said an executive.

A Bank of India executive said a commitment charge was levied if the borrower failed to withdraw at least 30 per cent of the sanctioned amount within the stipulated time.

A bank chief said a part of the problem was due to the large amount of infrastructure projects being given loan sanctions. In these cases, a commitment fee was not being levied.

As a result, are being increasingly levied to avoid asset-liability mismatch possibilities as banks raise deposits in line with the loans they have sanctioned and also on the future loan flow expectation.

“The provision of commitment charge is seen as an enabling provision. The provision was always there but was not implemented for the last few years. But now, as asset liability concerns are surfacing, banks are increasingly using the provision,” said an executive director of a public sector bank.

But the bankers also said this was a temporary thing, as they had some bargaining power in the present market. Once credit flow picks up, it will be back to earlier days.

First Published: Tue, December 22 2009. 00:38 IST
RECOMMENDED FOR YOU