Corporate loan rates up 2%

Banks come together to curb undercutting.

Corporate loan rates have shot up by as much as 2 per cent in the last one month. The lending rates have increased to around PLR (prime lending rate) minus 2 per cent from PLR minus 4 per cent till recently, banking sources said.

The PLR of banks is currently in a range of 10.25-10.75 per cent, which translates into lending rates of 8.25 per cent to 8.75 per cent.

The current interest rate level is in sharp contrast to the rate (of around 6 per cent) at which the companies could bargain during the days of high liquidity. The companies could pitch one bank against the other, taking advantage of high liquidity and competition among bankers to take on board blue chip corporates, the sources said.

A senior State Bank of India (SBI) official said, "The (trend of) cut-throat competition among banks to lend to the corporates at rates much below the prime lending rate has reversed. Sub-PLR lending still exists, but the gap has narrowed substantially now."

"Earlier, the short-term lending rates in some cases were around 400 basis points below the respective banks' PLRs. Now the rates are around 200 basis points below the PLRs," the SBI official pointed out.

During the last couple of years, the companies even managed to borrow short-term money for project funding and that too at "ridiculously" low rates and the banks unwittingly played into the hands of the firms, particularly the blue-chip ones, by undercutting each other.

"A blue-chip group's telecommunications subsidiary had approached us (a public sector bank) for a loan at 8 per cent, a rate lower than our cost of funds," an official of the Mumbai-based bank said.

"The matter was taken to our board and got approval for lending at 8 per cent two months later. The company did not avail of the loan as it was by then busy borrowing from other banks at 6 per cent," he added.

"Now that's a thing of the past. Banks (as decided in last month's meeting of the banks excluding ICICI Bank) no longer want to lend short-term for project funding. They also want to ensure that short-term lending for working capital and other corporate needs are also at rates closer to the PLR," the official said.

Some of the banks had also fallen into the trap of suicidal pricing of loans, having lent money at rates less than the deposit rates of one year-tenure. "Banks now consider the financial implications of lending at rates way below the PLR," the banker said.

Banks have also exercised the call option on most of the Rs 40,000 crore of Mibor (Mumbai inter-bank offered rate) linked daily put and call loans, thus ending the corporate world's party with low interest rates.