Short-term corporate loans hit FinMin wall

The finance ministry has slammed the brakes on short-term, unsecured loans of public sector banks.

In a recent communication to the bank chiefs, the ministry has said all such loans to the corporate sector can be sanctioned only after board approval and need to be backed by securities within six months of sanctioning, failing which the loan would need to be phased out.

The ministry's move is the latest in a series of such directives to public sector banks and comes within days of Reserve Bank of India Governor D Subbarao's comments that the government should not micromanage public sector banks.

In its letter, which does not give any reasons for its directive, the ministry has also asked banks to provide information about the non-performing asset creation from such loans.

"The ministry is putting restrictions on extending short-term,

unsecured loans to the corporate sector. This will mean the business will go to private sector lenders," said the chairman and managing director of a public sector bank who has received the letter.

According to bankers, short-term loans account for 5-10 per cent of a bank's total loan disbursal. Short-term loans are generally of less than one year's tenure and are extended to oil marketing companies and other corporate entities for working capital needs.

Public sector banks fear this directive from the government will result in losing business to private banks and non-banking finance companies.

Another public sector bank chief said the directive would make credit committees and management committees, which decide on loan sanctions, almost redundant.

"For every loan proposal, irrespective of the size, we now have to approach the board, which meets once in a month," he said.