Gap between loan sanctions, disbursals wide

Banks continue to sanction more loans, but guess what, companies aren’t picking up even half the money, bankers lament.

“Our sanctions grew by around Rs 60,000 crores in the last financial year. Of that undisbursed loans stand at about Rs 45,000 crores,” said SS Ranjan, deputy managing director and CFO, State Bank of India, the nation’s largest lender.

Meaning, SBI hasn’t begun earning interest on three-fourths of the loans it sanctioned last year.

“Corporates are very cautious about capacity expansion due to which there is a lag in sanctions and disbursements,” said Suresh Ganapathy, head of Macquarie Securities Group’s financial research team.

The story is the same at Bank of India, where sanctions stood at Rs 48,000 crore on March 31 this year, which marked the end of last fiscal.

“Our undisbursed sanctions are about Rs 25,000 crore. Projects are taking time to get implemented,” said M Narendra, executive director of India’s No. 4 lender. “We charged an average interest of 10% on what we disbursed.”

Things are no different at private sector and smaller banks.
Jaideep Iyer, president, financial management at Yes Bank said the bank has sanctioned Rs 22,000 crore in the last financial year, which is 73% more than in fiscal 2009, but two-thirds of that, or around Rs 15,000 crore, is undisbursed.

As credit growth had not picked pace in the last fiscal, net interest income (the difference between interest earned and interest paid) of banks slowed last fiscal, said Vaibhav Agrawal, vice-president-research, Angel Broking.

Nearly a third of all loans sanctioned by banks last fiscal were for infrastructure projects, estimated Indranil Sen Gupta and Dick Li, analysts with Bank of America-Merrill Lynch, in a report on March 25. They see infrastructure loans rising to 35% this year.
RBI data show a 42.3% growth in infrastructure loans between April 1, 2009, and February 26, 2010.

And that’s where the drag is.

“In the first 12 months post sanction, only 20% to 30% of a loan gets disbursed because projects get caught up in various approvals. Usually a major part of disbursements happen after 18 to 30 months of sanction,” said N Sivaraman, executive vice president (financial services), Larsen & Toubro.

E Sudhir Reddy, chairman & managing director, IVRCL Infrastructures & Projects, one of India’s biggest road builders, says it’s the nature of the beast. “If you take up NHAI (National Highways Authority of India) projects, they take a lot of time (to execute),” he explained.

But Reddy’s quick to add it’s not because of poor execution. “Project executions have been fine,” he said.

IVRCL is currently working on three development projects, three road projects and one desalination plant.

Pradeep Singh, vice-chairman and managing director, IDFC Projects, another lender, concurs: “There is usually a time lag and because there has been a significant increase in sanctions the gap is more pronounced this time,” Singh said.

IDFC Projects is currently developing a 1050 mw power project in Chhattisgarh, Madhya Pradesh.

Some blame banks’ blatant attempts to bulk up their loanbook - called ‘window-dressing’ - in the last quarter of last fiscal as the reason for the sanctions spree.

“Most banks were showing loan growth of around 16%. But to ratchet this up, they went on a sanctions binge in the last quarter of the last fiscal. Not all of these were disbursed by the time the year ended,” said Abizer Diwanji, executive director and head of financial services at KPMG, the audit firm.

“Credit growth will gather pace primarily driven by infrastructure this year too,” Diwanji said.

With the Indian economy expected to grow at around 8%, the Reserve Bank of India forecast growth in loans to be around 20% by the end of the current fiscal on March 31, 2011.

Analysts expect non-infrastructure loan demand to rise after September.

“Retail loans are already leading the turnaround in credit demand in a repeat of 2003-05. Anecdotes suggest the urban consumer is returning to borrow - especially, for housing - as confidence improves with better job prospects,” Sen Gupta and Li said in another note last week.

“We expect corporate loan demand to pick up in second half. Industrial credit had shown a lag even in the last upturn. Most banks have already reported an increase in loan sanctions. These should translate into higher disbursals as corporates gain better growth visibility,” they said.