Quick Prepayment Of Demand Loans May Be Permitted

The central bank also plans to raise the loan component of the maximum permissible bank finance (MPBF) to 80 per cent from the current level of 60 per cent in the busy season credit policy.

In another development, corporates availing of consortium advances are likely to be barred from accessing funds from banks outside the consortium.

RBI deputy governor S P Talwar discussed the gamut of lending norms at a high-level meeting with senior bankers in Mumbai on Saturday. This is the first time the RBI has convened a meeting to discuss the lending norms after introduction of income recognition, asset classification and provisioning norms to tone up the banking industry.

 

"No decision was taken at the meeting convened to take stock of the situation. The entire exercise was aimed at finding ways to strengthen credit discipline," a banking source said. The meeting assumes significance in the light of the huge losses reported by at least two nationalised banks due to indiscriminate lendings.

Among the senior bankers present at the meeting were M G Bhide, managing director, State Bank of India; Rashid Jilani, chairman of Indian Banks' Association and CMD, Punjab National Bank; K Kannan, CMD, Bank of Baroda; K R Ramamoorthy, CMD, Corporation Bank and T R Karunandan, executive director, Bank of India.

The meeting focussed on three aspects of credit discipline: the maximum permissible bank finance, loan system for delivery of bank credit and consortium lending.

Although the RBI is in favour of raising the loan component of MPBF to 100 per cent, most of the bankers are of the view that it should not be raised more than 80 per cent as the industry is not yet ready for the 100 per cent demand loan system.

In the last credit policy, the central bank had raised the loan component from 40 per cent to 60 per cent for big borrowers. For medium-size corporates with MPBF limits between Rs 10 crore and Rs 20 crore, the RBI introduced a 40 per cent loan component and 60 per cent cash credit limit.

Most of the bankers are in favour of introducing a prepayment system for demand loans with a commitment charge. "The central bank has appreciated the idea. The minimum repayment period can be fixed at 6 months and maximum at 18 months," one banker said.

The bankers are also in favour of fresh demand loan sanctions to enable corporates to adjust old loans.

However, at least one senior banker opposed the prepayment idea as it would, according to him, amount to demand loan being converted into cash credit.

The corporates availing of consortium advances are likely to be barred from accessing finances from banks outside the consortium. "In this system fund diversion can take place," one banker said. They also cited the instance of Nirlon which opened letters of credit with one foreign bank outside the consortium and ultimately turned sick.

The banks have also agreed to go for separate hypothecation for faster disbursal of loans before the joint documentation is completed in case of consortium lendings. The bankers are not in favour of any drastic change in the method of fixing MPBF.

"The ratio of current assets to current liability at 1.33 is alright. However, there should be covenants on the conduct of the account with the onus being on the borrowers,