SBI tightens grips on corporate borrowers; Rajan's imprint seen in new move

Reserve Bank of India (RBI) governor Raghuram Rajan, who will end his tenure on September 4, leaves his imprint on the new loan agreements that banks are sewing with companies to make lending practices tougher.

With the historic asset quality review (AQR) increasing the bad loans of all banks, the State Bank of India (SBI) has decided to introduce new screws to tighten their grip on borrowers.

All new corporate borrowers and those sitting on a huge pile of debt and delaying payments need to worry as India's biggest bank has come out with punitive measures that will potentially halt their diversification plans and increase interest rates.

SBI, as a lender, is going to empower itself with a veto power that can stop a company's adventures into new areas the bank is not in agreement with. If the company decides to disregard the veto power, SBI will retrench part of its overall loan exposure to the group.

SBI will introduce this 'restrictive' clause in all its new loan deals to corporates. "For all our new loans, we are having a clause that gives us veto power. Should the borrower still go ahead despite the veto, we have the right to call back the facilities sanctioned. The triggers are immediate. The moment there is any negative news on the company, whether external or internal, the bank will swing into action," SBI managing director B Sriram said in an interview to dna.

While preventing troubled companies from diversifying into areas beyond their core competencies, such a provision will also ensure that banks are not over-leveraged.

The move comes in the backdrop of SBI's bad loans touching a record high of Rs 98,000 crore as corporates overstretch to pursue very aggressive business expansion programmes.

Banks have put several big corporates under watch list. While SBI has put Rs 31,000 crore of its total gross advances of Rs 15 lakh crore on high vigil, ICICI's red alert is on loans amounting to Rs 44,000 crore.

Another unique measure by SBI is a dynamic rating system that will make faltering companies pay higher interest rates. The health of several corporate accounts, after all, needs constant monitoring. Stock statements will be submitted monthly and financial statements submitted periodically. This is expected to keep a vigil on the company's cash flows.

"We have set up a dynamic rating system that will be triggered the moment there is negative news on a company. When a company is downgraded, an internal bank rating is triggered and the cost of loans will go up," Sriram said.

SBI is also taking the help of consultants. Certain sectors like steel and power have become feeders to sticky loans due to cyclic demand-supply market situations.

Sriram said, "We are taking the help of technical and sector consultants to get feedback on loans."