Corporate loan rates above 10%

After home loans, interest rates on loans availed by blue-chip corporates are climbing back above 10 per cent.

The banking sector has moved back to a higher lending rate regime having seen more than required liquidity push down interest rates to rock bottom levels during more than three-and-a-half years of a soft interest rate regime.

Public sector banks (PSBs), which account for over 70 per cent of the country's banking sector, have finally raised their prime lending rates (PLRs) as a drop in their net interest margins started pinching.

PSBs have had to remain content with just tinkering with their sub-PLR rates for more than three months now despite a 100-150 basis point increase in deposit interest rates amid tightening of liquidity.

MBN Rao, chairman of Bangalore-based Canara Bank, said: "The excess liquidity in the system has already been absorbed. The cost of funds is growing and there is an upward bias in lending rates. The loans and advances extended at rates below the prime lending rates will see a 100 basis point rise in interest rates."

Almost half of the loan portfolio of the banking sector is at rates below the PLRs of the respective banks. PSBs have already raised their sub-PLR rates to 9.0-9.5 per cent level from 8.0-8.5 per cent till a little before the system began to experience tightness in liquidity in December 2005.

The liquidity squeeze happened in the backdrop of an unprecedented growth in credit over the last two years while the increase in deposits lagged, which resulted in over 100 per cent incremental credit-deposit ratio during the period and a record high overall credit-deposit ratio of 72 per cent at the end of March 2006.

Even before the PSBs raised their PLRs, some of the banks had started asking almost 100 basis points interest more than the rate fixed at the time of sanction.

PSBs "" State Bank of India, Bank of Baroda,Punjab NationalBank, Oriental Bank of Commerce, Canara Bank and Union Bank of India "" have raised their PLRs by 50 basis points, over 39 months after almost all of them brought down their rates by 25 to 50 basis points in January 2004.

A chief financial officer of a large company said the corporate sector, which is getting into seeking local funding for their expansion plans, will start feeling the pinch now as the government owned banks control majority of the banking system.

The recent hikes in general provisioning on standard loans to 0.40 per cent from 0.25 per cent on all loans except to agriculture and SMEs and to 1 per cent on lending to real estate, home loans over Rs 20 lakhs is also hitting the bottomline.

K V Kamath, managing director and CEO of ICICI Bank, the country's second largest bank, said the higher general provisioning requirements will push up lending rates by about 30 basis points, apart from the increase in cost of funds.

ICICI raised its PLR three times January-March 2006 to 12.75 per cent. It now wants to wait and watch before taking any further decision.

Kamath said "we will see how liquidity behaves in this quarter and will be in a position to decide by the end of June 2006. Anyway the current increase in rates (by PSBs) is a lag effect. It should have happened earlier."

A State Bank of India (SBI) official said rising costs of funds due to revision in deposit rates, pressure on margins following strong competition for resources and slow pace of growth in non-interest income were the factors driving PSBs including SBI to increase lending rates. SBI's net interest margins has fallen to below 3 per cent from 3.01 at the end of December 2005.

An investment banker of a foreign bank said the rise in interest rates in India will actually carry forward the increased tapping of external commercial borrowing (ECB) route by corporates as the current rise in interest rates will maintain the attractiveness of overseas borrowing.

United Bank of India chairman, UV Gupta said "unless we increased the rates, it would have been difficult to protect spreads (margins)."