Banks may be told to provide for unutilised portion of loans, too

MUMBAI: The Reserve Bank of India (RBI) is likely to ask banks to make provisions, or set aside capital, for the unused portion of their loans to clients.

As per standard provisioning norms banks have to set aside a minimum 40 basis points — or 0.40% of their capital funds — as a prudential, safety measure. That is, for every Rs 100 loan that a bank sanctions, it has to keep aside 40 paise.

Till date, only loans availed of by clients attracted this norm, not the whole sanctioned amount.

Now, the provisioning could include sanctioned, rather than just disbursed, credit, a senior industry source told DNA Money.

Given that sanctioned limits are invariably higher than disbursed credit at any given point in time, banks will have to reassess whether or not clients require the existing credit lines, or start charging on the unused portion of credit limit; may be even increase interest rates, the industry source said.

The new norm is likely to apply to both term loans and cash credit facilities.

Analysts believe such a move would translate into substantially higher capital requirements for banks.

Cash credit forms roughly 35% of all banking loans.

On the term loans side, about 15-20% of a bank’s assets are always rolling since sanctions and withdrawals keep changing from client to client.

An analyst with a foreign brokerage, who did not wish to be named, said such a move could be a one-time hit — if the provisioning requirement is only on incremental loans. “It’s more of a prudential thing,” he said.

A bank can lend not more than 15% of its capital funds of the last financial year to a single company, and not more than 40% of its capital funds to a group of companies as per regulations.

Sarika Purohit of Angel Broking points out that many banks continue to have asset-liability mismatches due to which they are often forced to take bulk deposits at higher costs to fund the pipeline of unused portion of sanctioned loans.

Vishal Goyal, banking analyst with Edelweiss Securities, sees an increase the risk-weighted assets of banks if they are told to provide for the unutilised portions.

“Such a move will goad banks to cut down on undisbursed loans. If some sanctions of a bank are cancellable, then the provisioning will be less by that much,” he said.