Banks up term loan rates by 50-100 bps

It's not just the short-term corporate loan rates that have moved up post the Reserve Bank of India's mid-term policy statement for 2004-05, even term loan rates are nudging up by 50-100 basis points.

This is being done without the change in banks' prime lending rates (PLR). One basis point is one hundredth of a per cent.

With the relative tightness in liquidity in the system, it is no longer a buyers' market. Commercial banks have started negotiating loan rates at their terms and conditions even with the big corporations.

"The tables have turned now. Earlier clients used to call the shots. Now they are ready to compromise and bankers are beginning to call the shots," said a senior public sector banker.

For almost two years now banks have been at the mercy of India Inc. with corporates demanding cheaper funds. Most banks' corporate lending business was fraught with poaching of customers and wafer thin margins.

"Post credit policy, the sentiment has changed and banks are demanding 50-150 basis points higher interest rates on term loans even from the tripe-A rated corporates. We are only seeing the initial signs of this and it is too early for bankers to rejoice," said the deputy general manager-credit, Union Bank of India.

Maharashtra State Electricity Board, Karnataka Power Corporation, Maharashtra State Road Transport Corporation, Gujarat Electricity Board are all in the market looking to tie up term loans of Rs 50-200 crore. "Earlier these PSU customers used to demand 8.5 per cent for a five year term loan. Now we are demanding 10 per cent interest. We may finally have to settle for 9 per cent but we are daring to ask for more," said the general manager in Bank of Baroda.

While the RBI has been clear in directing towards hardening interest rates, drying up of liquidity is also prompting bankers to harden the rates.

The overnight surplus funds in the repo market have shrunk considerably from the highs of Rs 50,000 crore a few months back to as little as Rs 3,000-5,000 crore in recent days.

"With liquidity drying up clients have little choice. The best of times are over for even for the AAA corporates," said a senior official in a large PSU bank.

In the annual policy statement the central bank raised the short-term repo rate by 25 basis points and mentioned clearly that the interest rate cycle had turned. However, central bank officials have pacified the economy that the interest rate hikes would be staggered.

One day after the repo rate hike, short term loan rates i.e., MIBOR linked loan rates for corporates rose by 25-75 basis points. The rates went up as the market-determined, MIBOR vaulted and so did the mark up charged over it.