MUMBAI, June 23: The State Bank of India is planning to treat the dividend and interest warrant facility offered to corporates, including a large number of non-bank finance companies, as a credit facility. The implication of this move is enormous: once this is treated as a regular credit facility, corporates will be required to offer collateral and even offer a charge on current assets to access the facility.

The bank is likely to treat the interest warrant facility as a contingent liability in its books on the lines of letters of credit (LCs) and guarantees, sources said.

The bank is also considering the possibility of pushing up the cash margin requirement for the facility and demand collateral. Currently, the cashing of dividend warrants is treated as a pre-funded facility and the bank does not take into account factors other than operational risks while granting corporates this facility.

The SBI's decision to overhaul the dividend warrant facility is direct fallout of the CRB Capital Markets fiasco in which it has lost Rs 58 crore.

CR Bhansali opened three accounts at the Mumbai main branch of the bank for interest, brokerage and dividend warrant payments last year and defrauded the banks to the tune of Rs 58 crore by availing himself of overdraft facilities and not replenishing the pre-funded facilities.

The bank has made a provision for the entire Rs 58 crore -- lost in the CRB Capital Markets scam—in its 1996-97 balance-sheet. The bank is in the process of rewriting its four-volume Book of Instructions—a legacy of the erstwhile Imperial Bank. The Book, a kind instruction manual for the bank's 2.5 lakh-and-odd employees, lays down norms on regulations, compliance, customer service and operational integrity.

Confirming the development, a senior SBI executive told The Financial Express: "We are exploring all possible ways to make the system of dividend and interest payment a foolproof one. One possible way could be to treat the facility as a credit facility, like LCs and guarantees."

"The difference between LCs/guarantees and the dividend warrant facility is that the former is a facility to corporates while the latter is a facility to the shareholders of corporates, even though ultimately it is the corporate who pay for the service," the executive said.

According to sources, once the SBI central board adopts a resolution to treat dividend warrant payments as a credit facility, for all practical purposes it will be treated like a working capital exposure where cash margins can be imposed and a charge on current assets taken to ensure the clearance of overdrafts.

"Like LCs and guarantees, the dividend warrant facility will also be treated as a contingent liability and hence we will carefully guage the risks involved in fee-based activity. There will also be a delegation of discretionary powers among executives in terms of sanctions of the facility," sources said.

LCs and guarantee, even though they are non-fund based activities, carry a 50 per cent risk weightage. Following the Reserve Bank of India's recent directive on the tightening of dividend and interest warrant payment norms, the State Bank has also decided to restrict the facility to only 25 branches nationally to improve scrutiny. This will force corporates to opt for multiple banking arrangements to pay dividends to their shareholders.

"Commercial banks offer dividend warrant facilities as it gives them free float funds besides the fees. Tightening the norms may not be an easy task as banks compete with one another for float funds. If the State Bank refuses the facility to the corporates, some other banks may step in and offer attractive terms to wean away corporate clients," a leading market analyst said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.