Oil cos resort to ST loans as crude prices bite

Oil companies are devising new strategies to borrow more from the banking system following an increased demand for credit to pay for crude.

Instead of striking long-term lines of credit with banks, they are issuing short-term instruments like commercial papers (CPs) to raise funds. This is helping them to roll over the limit every three to six months and keep the flow of credit intact in the face of higher demand.

The corporate sector raised Rs 2,156 crore through CPs at interest rates ranging from 5.50 per cent to 7.50 per cent for the fortnight ended August 15. This has taken the outstanding CP amount to Rs 19,227 crore. The share of oil companies in this is around 45 per cent.

The issuance of CP started to rise since the beginning of the current financial year and the amount shot up in recent months with an unprecedented surge in oil prices, from $57-58 per barrel to a high of $65 per barrel.

Indian Oil Corporation, Bharat Petroleum, Hindustan Petroleum and Reliance have also been busy prepaying their loans. According to banking sources, these companies are raising new loans in the domestic as well as overseas markets at cheaper rates to prepay their old loans. The move is also giving them an opportunity to create fresh borrowing limits.

With oil prices remaining high, most banks have exhausted their borrowing limits for oil companies. While the number of players remain the same, the need for funds to pay for crude has shot up dramatically with the rise in oil prices.

The banks have urged the RBI for a relaxation in the borrowing limit for the oil companies. They have also taken approvals of their respective boards to relax the borrowing limit by 5 per cent over and above the exposure limit.

The RBI allows banks to lend up to 15 per cent of their capital funds to a company and 40 per cent to a group. With the boards' approvals, the exposure limit can go up by 5 per cent in each category.