One-day money gains currency with India Inc

Total lending under put and call loans estimated to be around Rs 40,000 crore.

An increasing number of companies is drawing bank loans with daily put and call options. The new lending product, a bond, technically offers one-day money to corporate India as banks can call back the fund whenever they want and the companies, too, can return the money if they do not want it.

Put- and call-lending currently accounted for 5-7 per cent of most banks' total loan portfolio and earned interest ranging from 5.4 to 6.5 per cent, banking sources pointed out. The total lending under put and call loans is estimated to be in the range of Rs 35,000 crore to Rs 40,000 crore.

Companies are finding this avenue a cheaper way of raising funds. Otherwise, they will have to pay at least 7 per cent or so for one-year money. The only hitch is that companies need to be always prepared to meet banks' call option.

"Corporates normally arrange for adequate lines of credit from various banks for funds whenever lenders exercise the call option," said the chief financial officer of a manufacturing company.

On the positive side, the put option allows a corporate to repay a loan if its liquidity position improves and if it no longer needs the money.

The call option, on the other hand, gives a bank the leeway to recall a loan if it finds its liquidity position under strain. The call option is normally not exercised by large public sector banks as they hardly face liquidity pressure.

Banks find the put and call avenue for parking funds the most prudent way of managing excess liquidity as it earns a little more than they will in the overnight call money market where the rate is about 5 per cent. These loans have a maturity period of one year.

It also does not carry the risk of depreciation as in the case of investments in government securities where banks need to market their portfolios.

A public sector bank executive says, "The put- and call-lending provides over 1 percentage points higher return than funds deployed in call money. The other option for parking excess money is the RBI's reverse repo window, but there, too, the interest rate offered is 5 per cent."

"These (put and call loans) are Mibor (Mumbai inter-bank offered rate)-linked bonds with anytime put and call options. Instead of the call money market, banks prefer to lend to corporates as they enjoy a better yield. This kind of credit is popular among large cap companies," says GV Nageswara Rao, CEO-commercial banking SBU of Industrial Development Bank of India.

Mibor is currently in the range of 5.10-5.15 per cent. Banks' lending to corporates under the put and call product is at Mibor plus 30-70 basis points. One basis point is one-hundredth of one per cent.

RBI Governor YV Reddy, at a recent Ficci-IBA seminar on banking, had referred to under-pricing of the credit risk for private sector corporates as an area of concern, in the backdrop of public perception that there could be overpricing of risks in lending to agriculture as well as small and medium enterprises. He had also stated that there was merit in reviewing the current procedures and processes of pricing of credit.

ADDING SPICE

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• The put and call lending currently accounts for 5-7% of most banks' total loan portfolio and earns interest ranging from 5.4-6.5%
• Companies are finding this avenue a cheaper way of raising funds as otherwise they will have to pay at least 7% or so for one-year money
• The put option allows a corporate to repay a loan if its liquidity position improves and if it no longer needs the money
• The call option gives a bank the leeway to recall a loan if it finds its liquidity position under strain