Banks and financial institutions had till recently discouraged prepayments for fear of assets liability mismatches and loss of high return asset.
Bangalore, Aug. 9
FACED with burgeoning credit demand, public sector banks are encouraging prepayment of loans.
Most banks, especially in the public sector, no longer impose prepayment fees on foreclosed loans.
Syndicate Bank Chairman and Managing Director, Mr N. Kantha Kumar, said, "Prepayments are a win-win situation for both counter parties." Among the entities making prepayment are State Finance Corporations (SFCs) that have taken high-cost loans, sometimes as high as 11 per cent.
Banking sources said some SFCs also had overdues. Consequently any prepayment from them helped banks bring down non-performing assets or potential non-performing assets. For bankers, prepayments also take care of past overdues.
According to revised norms, even obligations guaranteed by the state government must be brought within the ambit of the 90-day norm by next fiscal.
This implied that debt-servicing obligation dues in excess of 90 days would automatically be qualified as substandard assets.
Besides, not many bankers were keen to transfer such NPAs to an asset reconstruction company as this would result in discounted face values or losses to the bankers.
Instead, some public sector banks were even willing to waive penal levies on overdues, whenever there was prepayment.
This would help SFCs bring down financing costs.
Banks and financial institutions had till recently discouraged prepayments for fear of assets liability mismatches and loss of high return asset. In fact, most banks even levied hefty premiums to curtail prepayments and partly offset the losses incurred on loan foreclosures.
But bankers said such a situation no longer existed owing to the high credit growth rate. Year on year, credit offtake has grown about 25 per cent, entirely driven by non-food credit and the retail sector, which accounted for the bulk of growth.
For most banks, funding this high credit growth has pushed up the incremental credit deposit ratios close to 100 per cent. Funding for the increased credit was partly through deposit mobilisation and partly through sale of investments.
But bankers said prepayments helped recycle funds much faster and also reduced bankers' liability to maintain statutory liquidity ratios.