The Industrial Credit and Investment Corporation of India (ICICI) sent the financial markets into a tizzy yesterday when it announced a medium term prime rate (MTPR) of 13.5 per cent for all advances of less than 30 months, which is widely expected to trigger an all-out rate war as the firewalls between the banks and financial institutions crumble in the heat of intense competition.
The Industrial Development Bank of India the big daddy among the FIs had announced on Monday that it would be entering the short-term lending market which until now has been the exclusive preserve of the commercial banks.
ICICI which has emerged as a canny market player created history in the financial market by announcing a base rate for short-term loans that is 50 basis points lower than the prime lending rate of 14 per cent set by State Bank of India, the premier commercial bank, which serves as a benchmark for the banking industry.
The ICICI decision, which is expected to take the high-cost Indian economy into a realm of moderate cost, comes at the end of a series of rate cuts initiated by commercial banks soon after the slack season credit policy was announced earlier this month.
The ICICI board, which met in Mumbai, also decided to cut its prime lending rate by 150 basis points to 15 per cent, matching IDBI and the Industrial Finance Corporation of India (IFCI). The new PLR will cover long-term loans with a duration of over 30 months. The maximum spread over the prime rate has been fixed at 3.5 per cent.
Less than a week ago, K V Kamath, ICICIs managing director and chief executive officer, had ruled out an immediate cut in the PLR saying that there was no decline in the cost of long-term funds.
With the abolition of the maximum permissible bank finance and consortium lending, corporates are expected to shift from commercial banks to ICICI to meet their short-term funding needs. ICICI which has emerged as a financial behemoth since its merger with SCICI Ltd earlier in the year might even spirit away clients from IDBI whose PLR for short term loans is the same as that for long term loans at 15 per cent.
Sources in the financial sector term the introduction of the MTPR as an act of bravado to contain the losses arising from recently raised high cost funds. ICICI recently raised money at 16.5 per cent.
Medium term and long term rates are unlikely to come down further and ICICIs announcement of an MTPR is not likely to have any serious immediate impact on the PLRs of banks, said M.S. Verma, chairman of State Bank of India. The use of the MTPR is limited as no project can be implemented in 30 months. It appears more like a bridge money finance which the ICICI is hoping to deploy.
IDBI executive director P S Subramanyam said, Interest rates have moved down only at the short end. At the long and medium term, the interest rates are bound to move up as the cascading effect of imminent oil price hike due to the huge oil pool deficit will push up inflation. With inflation moving up, interest rates will also move up.
Commenting on the decision to introduce the MTPR, Lalita Gupte, deputy managing director of ICICI, said, Yield curve based pricing has now become imperative. Having a single PLR is no answer to the requirements of short term borrowers. From now on, you will see the LTPR and the MTPR being reset according to the liquidity position. The cut in the interest rates is expected to spur investments in the economy, she added.
The introduction of the MTPR will help companies which want short-term finance from the financial institution. While ICICI will continue to focus on long term funding, it will also fund the working capital requirements of the companies. ICICI officials point out that in the past they have funded the short-term requirement of corporates. The introduction of MTPR is not expected to affect the asset-liability match of ICICI.
At the moment we are able to raise 1 year money at 11.5 per cent and five year money at 14.25 per cent, says an ICICI official. In the last financial year, less than 15 per cent of ICICIs total borrowings came from retail sources via public issue.
To avoid any severe asset-liability mismatch, the financial institution is expected to match the tenor of its liabilities with its assets. Hence, it will be raising money for periods varying between 1 year and five years and more. In the present financial year, ICICI will also continue to borrow a major portion of its funds by privately placing the bonds with provident funds, banks and other institutional investors.
ICICI plans to disburse Rs 13,500 crore in the current financial year, of which Rs 10,000 crore will be in denominated in rupees. While Rs 7,500 crore will be in the form of long term funding Rs 2,500 crore will be in the form of loans below 30 months.
During the financial year 1996-97, the combined disbursement of ICICI and the erstwhile SCICI stood at Rs 11,181 crore, representing a 16 per cent growth. On the other hand, the aggregate sanctions stood at Rs 14,313 crore.
ICICI officials contend that the reduction in the PLR will not affect their bottomline. They point out that there has been a reduction in their cost of funds. Gupte says that the cost of funds will be lower this year.
Referring to the recently concluded bond issue, she said that ICICI has decided to retain oversubscription only to the extent of Rs 50 crore. The ICICI bond issue had mopped up Rs 2,500 crore. The issue was for a sum of Rs 750 crore with the option to retain oversubscription up to Rs 750 crore. The bond issue had mopped up Rs 400 crore from retail investor and it has now been decided to retain a similar amount from the wholesale investors. The decision to mop up only Rs 800 crore has been taken in view of the falling interest rates.
FI shares range-bound
The Leading financial institutions IDBI, ICICI and IFCI fluctuated in a narrow range in the markets yesterday. At 17.30 hours IST , the ICICI GDR was marked at $10.37 against the previous level of $11.
The ICICI counter in the dematerialised segment dropped Rs 4.40 to Rs 57.60 at close. On the BSE, ICICI closed at Rs 58.25, gaining 50 paise over its previous close of Rs 57.75. On the NSE, the share closed at the previous level of Rs 58. The traded volume was 5.03 lakh shares on the BSE and 3.21 lakh on NSE.
On the BSE, IDBI closed at Rs 87.25, losing 50 paise over its previous close of Rs 87.75. On NSE, the scrip closed at about the same level losing only 5 paise over its previous close of Rs 87.50. The recorded volume was 8,600 on the BSE and 40,400 on NSE.
On the BSE, IFCI closed at Rs 26.75, losing 25 paise over its previous close of Rs 27. On the NSE, it closed at Rs 26.75 losing 30 paise over the previous level of Rs 27.05. The traded volume was 16,700 shares on the BSE and 78,900 on NSE.
Marketmen said the slack season credit policy announcement on April 15 had failed to impact on FI stocks. ICICI closed at Rs 60.25 on the day the policy was announced and was range-bound thereafter between Rs 57.75 and Rs 60.50.
The IDBI scrip has also been trading in a tight band of Rs 91 (on the day of the policy) to Rs 87.25, which is the lowest price during the month.
FIs plan to exercise call option on bonds
Our Banking Bureau MUMBAI
Financial institutions are not worried about funds locked in at high interest rates which they had raised during the previous financial year. Most of them are planning to exercise the call option on their public issue of bonds much before the expiry in a bid to reduce the high cost of borrowings.
The Industrial Development Bank of India (IDBI), Industrial Credit & Investment Corporation of India (ICICI) and Industrial Finance Corporation of India (IFCI) had raised funds at rates above 16 per cent for periods up to 25 years.
IFCI is the worst hit among the FIs, as substantial portion of the amount mopped up during the public issue of bonds in July 1996 are still undisbursed. ICICI and the IDBI have already deployed their funds at spreads of around 3.5 per cent above the coupon rates.
Funds raised when the interest rates were high are less than 10 per cent of the total assets of the institutions, hence it has a marginal effect on the average cost of funds marginalised, said ICICI sources.
IDBI chairman & managing director S H Khan had said at a press conference in Mumbai on Monday: IDBI will consider the call option if the downward trend in the interest rates continues. It will definitely improve our bottom lines if we repay the earlier debt by borrowing at low rates. However, the earliest call or put option can be exercised only after the minimum stipulated period of three years is over under the terms announced in the prospectus. Meanwhile, IFCI sources explained that, with the institution borrowing at over 16 per cent, the minimum cost of borrowing should range between 20-21 per cent after accounting for spreads and bad debts.
