Two major financial institutions Industrial Development Bank of India (IDBI) and Industrial Finance Corporation of India (IFCI) yesterday slashed their prime lending rates to 15 per cent (exclusive of interest tax), signalling a lowering in the cost of long-term funds.
While IDBI cuts its prime lending rate by 150 basis points, IFCI did so by 100 basis points.
The new PLR will be applicable to loans for which agreements are executed on or after May 1 and will remain effective during the currency of the loan.
The prime lending rate is the benchmark for interest rates on loans to borrowers. Only the most creditworthy customers obtain loans at the prime lending rate.
The cut in the PLR by the two financial institutions means that there is only a one per cent differential with the State Bank of India the countrys premier commercial bank which has fixed its prime rate at 14 per cent.
The third institution Industrial Credit and Investment Corporation of India (ICICI) has called a board meeting today where it is expected to consider a PLR cut.
Less than a week ago, K V Kamath, ICICIs managing director and chief executive officer, had ruled out an immediate cut in the PLR. He had said then that there was no decline in the cost of long-term funds.
According to an ICICI spokesperson, the financial institution is now looking at the possibility of cutting the prime lending rate since it has been able to raise funds on tap at around 14 per cent.
The rate cuts were triggered by commercial banks soon after the slack season credit policy was announced. Yesterday, Syndicate Bank announced that it was cutting its PLR by 1 per cent to 14 per cent (exclusive of interest tax) with effect from May 1. The maximum spread for advances except consumer credit will be 4 per cent. The spread on working capital demand loans will be 3.5 per cent.
A press release announced by the bank said it would offer interest at the rate of 5 per cent on domestic deposits of a duration of 30-90 days, 7 per cent from 91 to 179 days, 9 per cent from 180 days to 1 year, 10 per cent for over 1 year to 2 years, 11 per cent for over two years to three years, and 12 per cent for deposits with a maturity of over three years.
IDBI the apex term lending institution is planning to raise nearly Rs 11,000 crore in rupee resources during the current financial year and another $ 850 million through the foreign currency route.
We plan to approach the public with a debt issue only once during the current year, said S H Khan, chairman and managing director of IDBI. The cost of funds for the IDBI during the current year is expected to be significantly lower as a result of downward movement of interest rate following the announcement of the monetary policy by the Reserve Bank. The reduction in PLR by 150 basis points should not be considered huge as IDBI had revised its rates only once in November 1996 as against revision on four occasions by the banks in the last ten months, added Khan.
Giving the rationale for the cut in PLR, Khan said interest rates were falling across the board. He pointed out that the cost of government borrowing for 10 years was down from 14 per cent in the beginning of the year to 13.05 per cent.
Moreover, companies like Steel Authority of India are now raising bonds at a little over 14 per cent against 17 per cent last year.
The reduction in the prime lending rate will not affect out bottomline as the overall interest rate in the economy is softening which will also lower our cost of borrowing. IDBI raised nearly Rs 3,000 crore during the previous financial year at rates above 16 per cent, which has already been deployed. Against an asset base of around Rs 50,000 crore, the funds raised last year is less than ten per cent, said Khan
Meanwhile, rupee borrowings by the IDBI during 1996-97 amounted to Rs 9,803 crore. The amount was raised through public and private placement of bonds and certificates of deposits. Foreign currency borrowings amounted to nearly $ 532 million, consisting of a floating rate note issue of $ 150 million, syndicated / club loan loans of $250 million, bilateral loans of $ 50 million and DM 50 million, and a line of credit of $ 50 million.
