Companies seeking short-term loans may have to factor in a 25-50 basis point rise in the cost of funds in the coming month, as lending for 3G auctions and advance tax payment is set to squeeze excess liquidity. And, rising delinquencies in the corporate portfolio over the last quarter has led banks to tread carefully in disbursing such loans, the majority being unsecured.
As a result, alternative instruments such as commercial paper (CP) and non convertible debentures (NCDs) are expected to gain popularity among companies, even though the traded portfolio does not reflect in the credit offtake of banks.
The country’s largest lender, State Bank of India (SBI), has already raised the short-term corporate lending rate by about 25 basis points. Another 25-point rise in such lending could not be ruled out in the coming month, hinted a SBI official.
Public sector lender UCO Bank is contemplating a 50-basis point rise in lending and deposit rates in June. “Liquidity is becoming tight, and a rise in interest rate cannot be ruled out. We might increase the interest rate by 50 basis points in June, both in deposits and lending,” said S K Goel, chairman and managing director.
To ease liquidity concerns, the Reserve Bank of India (RBI) on Wednesday raised the limit on bank borrowing under its repo facility by 0.5 per cent of their deposits. Telecom companies are required to pay up to Rs 68,000 crore against their allotment of spectrum for providing third generation (3G) mobile services. Besides, advance tax payments are expected to further dry up liquidity to the tune of Rs 40,000 crore.
TIGHTER EXPECTATION
“RBI is trying to ease the liquidity pressures, but there is a kind of apprehension about a rise in interest rate in the short term. Overall, the rates will not be affected, but if the situation remains the same, there is a likelihood of an upward pressure on the interest rate in short-term instruments,” said Bhaskar Sen, chairman and managing director, United Bank of India.
Corporates can raise short-term money through a 90-day CP at less than five per cent, much less than a short-term loan from a bank, according to Karthik Srinivasan, co-head, financial sector ratings, Icra.
“Since the short-term lending rate is going up, many companies are now opting for CPs to raise fund. However, the credit offtake is not much, and since the CPs do not account in advances, the credit growth target may not be met. As a result, towards the end of the quarter, we may go for some short-term lending, though at present it it is very low,” said an executive of a public sector bank.
Many banks have already slowed short-term loans, as delinquencies spiralled. For SBI, in the last quarter there was an addition of Rs 1,062 crore of bad loans (NPAs) from companies, a major contributor to the NPA rise by Rs 674 crore in the quarter.
“We do not encourage short-term lending, because the end-use is not clear and loans are not secured. We have not renewed a majority of short-term loans at below PLR rates, as there is a risk of default,” said an executive of Allahabad Bank. Most triple-A rated companies are dependent upon such loans, availing of these loans much below the prime lending rate.
“We do not go for lending at a very low interest rate. RBI’s measure is more like a signal. The future rates of interest will depend more in liquidity conditions. As of now, no major change in interest rate is seen,” said K R Kamath, chairman and managing director, Punjab National Bank.
