SynopsisWith the Reserve Bank of India (RBI) changing the rules to help public sector banks (PSBs) grab business from MNC lenders, some of the PSBs are planning to frame policies and seek board permission to offer large overdrafts, running into thousands of crores, during the day to top corporates, two senior bankers told ET.
Large corporates make easy money by taking ‘daylight overdrafts’ (DLOD) — virtually interest-free intra-day loans — from MNC and a handful of private sector banks, and parking the funds in ultra-liquid mutual fund schemes. The banks lend merrily because the corporates repay the money by evening, and throw in other businesses which more than make up for the interest the banks forego on DLODs. Over the years, foreign banks and corporate treasuries have perfected the transaction.
Now, large state-owned banks want to cut such deals. With the Reserve Bank of India (RBI) changing the rules to help public sector banks (PSBs) grab business from MNC lenders, some of the PSBs are planning to frame policies and seek board permission to offer large overdrafts, running into thousands of crores, during the day to top corporates, two senior bankers told ET.
According to new regulations, a bank can have a current account of a company only if its exposure to the company is at least 10% of the banking system’s exposure. The exposure comprises of loans, non-fund facilities like guarantees, daylight limits, a bank’s investment in bonds issued by the borrowing company, etc. Though MNC banks are not large lenders, they have been running large corporate current accounts — which are a source of cheap funds, overnight float, a window to payment and cash management services, as well as an opportunity to cross-sell products to the borrower and its other group companies. It was a strategy to earn from fees without committing larger capital required for loans and running the risk of some of them turning into non-performing assets.
Even though DLODs are included in calculating a bank’s exposure, the DLOD lines (along with a few other forex deal elements) of an MNC bank to a company do not add up to 10% of the exposure of the banking industry to that borrower. This is forcing large firms to move their current accounts from MNC banks (which currently give DLODs) to PSBs which have large and longer loan exposures to them.
“Once a company shuts its current account with a foreign or private bank, the bank will have no interest in extending DLODs to that company. So, the company will ask the PSB with which it now opens current account to allow a daylight limit. While PSBs do accommodate some clients during the day and give ODs against ‘uncleared funds’, the amounts are not high. Also, the product is somewhat different,” said a banker.
How does the DLOD line work? Consider a company which expects ₹1,000 crore inflow during the day from various parties but receives ₹400 crore by 2 pm (which is the cut-off time for investing in mutual funds); at this point the company draws ₹600 crore DLOD line from the bank which charges a nominal commission (and at times nothing) for the facility, and puts the entire ₹1,000 crore as overnight investment in MFs. By the ‘end of the day’— which may be 5 pm when the money market closes or midnight depending on the lending bank’s internal rules — the corporate receives the balance ₹600 crore and settles the DLOD with bank.
The transaction calls for a fine calculation by the corporate and the bank: the corporate has to be fairly certain that the balance amount would come in from its business by the close of the day; the bank, similarly, would want the DLOD to be cleared by the end of the day as carrying the exposure overnight not only means taking a higher risk but also arranging more capital.
“Recently, one of the private sector banks faced a problem following a snag in its system. As a result some of the DLODs were converted into short-term loans… Typically, the ODs given by PSBs against uncleared funds are daytime ODs to good clients on the back of uncleared cheques. It is not the money that would flow into the client’s account electronically through the day via RTGS. With a 24×7 RTGS, some of the MNC banks settle DLODs with inflows into a client’s account till midnight,” said an official with a foreign bank.
Foreign banks give DLODs to mutual funds to tide over cashflow mismatch and handle redemption. Since MFs are not large borrowers, MNC and private banks’ DLOD exposures may be good enough to meet the 10% rule — allowing them to continue business with fund houses.