Banks turn rate heat on India Inc

Corporates being compelled to pay higher rates on term loans of 3 years and above, struck at fixed rates a year ago.

Companies pressured banks into lending at very low rates in times of ample liquidity. It's now the turn of banks to compel corporates to pay higher interest on term loans of three-years and above, that were struck at fixed rates a year ago.

Companies are either being asked to close the loan accounts or are being stopped from drawing more loans from the same bank or another bank, unless they agree to an upward rate revision.

These term loans have a clause providing for re-setting the interest rates after two, three or five years depending on the loan tenure.

Banks, faced with the rising cost of resources, want to earn higher interest income from these loans from now and are not willing to wait till the reset clause gets triggered. Banks need to immediately boost their interest income as they grapple with the rising cost of funds.

"Banks are trying to re-negotiate the fixed rates. Though the top companies may not agree to re-negotiate the interest rates on fixed rate loans, it is already happening with the mid-sized corporates," said the executive director of a large public sector bank.

The banks are exerting pressure by stopping further disbursements of unused sanctions or by holding back the issue of no-objection certificates (NOCs) to companies seeking to raise additional funds from other lenders.

The companies require an NOC from their existing lenders, if they want to avail of funds from other lenders. Banks are also using the call options to compel borrowers to close their loan accounts.

The call option in the loan agreement allows banks to call back a loan and similarly, a put option lets a borrower to pay back the loan before the term ends.

"When liquidity was easy, we lent to corporates at low rates. Now, we are talking to customers to (agree to) push up interest rates on 3-5 year term loans, which were contracted at rates 2-3 per cent lower than the prime lending rate prevailing then," said a senior official of another public sector bank.

The banks' prime lending rates (PLRs) have increased by 250-300 basis points during the last one year. The PLRs of the five largest banks have increased to 12.75-15.75 per cent from 10.25-12.75 per cent a year earlier.

For loans given at rates that were 2-3 per cent lower than the benchmark rates a year ago, companies are now enjoying rates which are 450-550 basis points lower than the current PLRs. The banks have nearly stopped lending at rates below their PLRs, now.

"A company may have the right to continue with the contracted interest rate, but when it comes to us for a no-objection certificate (for availing a loan from another bank), giving the certificate is the bank's right," said an executive director of a Mumbai-based public sector bank.

The other option is to close the account and stop disbursements to the corporates. The corporates can shift the account to another bank, said another senior public sector banker.

Analysts estimate that about 15-20 per cent of the total loan portfolios of banks could be term loans disbursed to companies at fixed rates of interest.