Banks fix rate floor for firms

6.75% for short-term, 9% for long term.

Almost the entire Indian banking industry today decided not to lend to corporates below 6.75 per cent interest rate for short-term loans. For the long-term loans of over 12 years, the floor rate has been fixed at 9 per cent.

"We cannot afford to lend below this rate at this point of time. These floor rates will be revised depending on the movement of interest rates," said a senior executive of a large public sector bank.

The decision was taken today at a meeting of senior bankers in the State Bank of India headquarters in Mumbai. Except for the ICICI Bank, most of the private sector banks including the HDFC Bank and all public sector banks were present at the meeting.

Those who were not present at the meeting gave their consent in writing supporting the resolutions passed at the meeting.

Today's meeting opened a new chapter in Indian banking which would put an end to the practice of loan shopping by the powerful corporations.

"We need to have some credit discipline. All banks agree that the industry cannot afford to lend below the marginal cost of funds. At this point, 6.75 per cent is the ideal rate for short-term loans which will cover the cost of funds and give us a modest profit," said one of the bank's chairman.

Following this, fierce under-cutting of rates by banks will stop and cost of loans by corporates will go up by about half a percentage point as triple-A rated companies now access short term loans at 6.25 -6.50 per cent.

Bankers refused to describe the move as cartelisation. "Worldwide, airline industry follows this formula. Even the oil producing countries work out a benchmark for pricing. There is nothing wrong in banks doing so," a senior banker told the Business Standard.

The meeting was organised outside the aegis of Indian Banks' Association. Even though the State Bank of India took the initiative in arranging the meeting, the Punjab National Bank (PNB) has been chosen as a convenor for all such meetings in future. The SBI will continue to offer logistic support. The PNB will hold the next meeting after a month.

Banks have decided against offering short-term loans for project financing. Normally, corporates raise one-year money from banks for a long-term project at cheap rate and roll it over for years.

"We will not do that any more. Any bank which wants to lend short-term money for long term project financing needs to discuss the proposal before the committee of bankers which is being formed," said another banker.

Similarly, no bank will offer loan at below the floor rate. In case any bank wants to do so it needs to justify the move to the committee.

New Lending order

No long term lending at short term rate

Except ICICI Bank, all private and PSU banks are united

Bankers' committee to meet every month

PNB to take leadership, SBI to lend logistic support