Public sector banks to change norms for loan to Corporates |
After decades of following a set pattern, Indian banks may just change the way they lend. After a number of banking scams and frauds, India`s government owned banks are likely to change they disburse loans to corporates. Since the 1970s, public sector banks have given out most working capital loans, required for day-¬to¬day operations of a business, on the basis of net current assets of corporate borrowers, a system that has resulted in over¬funding to some and under-funding to others. India`s largest lender, the State Bank of India, has now proposed a transition from an `asset based lending` model to `cash flow based lending`, a mechanism that may reduce misuse of funds by borrowers and enable banks to figure out ability of borrowers to service loans on time. The shift will require borrowing entities to share their cash flow statements more frequently with banks. In cash flow based lending, banks will have to consider actual cash inflows and outflows of a company in deciding the drawing power. Inflows would be sales realisation, fresh borrowings, repayment by debtors, new capital infusion and sale of fixed assets, while outflows would include salaries, taxes and loan repayments.
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