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Anirban Nag
Mumbai, Feb 14: The Reserve Bank of India (RBI) has significantly eased bridge-loan norms for corporates by allowing banks to extend such loans against expected proceeds of non-convertible debentures (NCDs), external commercial borrowings (ECBs) and global depository receipts (GDRs). The central bank has said that the loan period should not exceed more than one year.
In a circular issued recently, the Reserve Bank said: "It has been decided to permit banks to extend loans, besides against the expected equity flows, also against the expected proceeds of NCDs, ECBS, GDRs and funds in the nature of foreign-direct investments, provided the bank is satisfied that the borrowing company has already made firm arrangements for raising the aforesaid resources." This is the first time that the central bank has relaxed bridge-loan norms after it re-introduced the loans in October 1997.
The move will help corporates to meet their short-term fund needs in a better and a more efficient manner, bankers said. It is alsoexpected to provide a big boost to credit offtake in the banking sector, which has been lagging for quite sometime now. Banks subscription to bonds issued by corporates has touched Rs 38,916 crore on January 29 as against Rs 29,548 crore on March 27,1998. This constituted a major chunk of non-food credit.
The Reserve Bank had in its credit policy, unveiled in October 1997, allowed banks to sanction bridge loans to companies against expected equity flows. The central bank has said that the total amount of sanctions under bridge loans should be accommodated within the ceiling of 5 per cent of the incremental deposits prescribed for banks' investment in shares, convertible debentures of corporates, including PSU shares, loans sanctioned to corporates for meeting promoters' contribution and in units of mutual funds scheme--the corpus for which is not exclusively in corporate debt instruments.
Bankers said that bridge loans had not really taken off as equity issues from corporates have been dwindling owing toweak sentiments in the capital market. "There are no equity issues in the primary market. As a result no bank could lend to corporates under the bridge-loan route," a senior public-sector banker said.
On the other hand, corporates have been assessing the domestic debt market to meet their fund requirements. Although the ECB route has dried up, due to volatility in the international markets and downgrades by international rating agencies, the GDR market has been revived by the PSU disinvestment programme.
The Reserve Bank had banned banks from extending bridge loans after the MS Shoes affair came to light in 1995. The company had raised bridge loans from banks, but it later turned out that the funds had been misused. The banks have written off the amount due from MS Shoes as non-performing assets.
INSIGHT
Credit offtake will improve
Bridge loans against equity not having taken off owing to sluggish equity markets, banks will welcome the opportunity to use such loans against expectedinflows from debt issues. The scope for such loans can be judged by the fact that, while total equity (including preference shares) mopped up through the primary markets during April 1998 to January 1999 was Rs 9,165 crore, the total amount mopped up by debt issues was Rs 22,527 crore during the same period. Corporates' cash flows will benefit, as will banks' credit offtake.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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