There is finally some good news for corporate borrowers.
After rising for more than a year, short-term interest rates have started falling since the beginning of the month, thanks to improved liquidity.
Banks have started offering lower rates to corporate clients for short-term loans.
Banks' borrowing from the liquidity adjustment facility of the Reserve Bank of India fell sharply in July as compared to June.
While the average daily borrowing in June was Rs 74,000 crore (Rs 740 billion), it was only Rs 20,000 crore (Rs 200 billion) in July, indicating that most large banks have adequate funds.
As a result, though banks have increased their base rates, they are settling for thinner margins while deploying funds.
"If we park our funds in money market instruments, we will not get more than 7.5-7.6 per cent.
"Giving loans to companies for the short term, that is, for 30 days or 60 days, even at the base rate, will fetch more," said an executive director of a large public sector bank.
Most public sector banks have increased base rates by 25 basis points since the beginning of the month.
At present, the base rate of major public sector banks is 10.25 per cent, except State Bank of India, whose base rate is 9.5 per cent.
Base rates -- the benchmark for loans -- have risen by 200-225
When liquidity was tight, banks were keeping a spread of 25-50 basis points for short-term loans to top-rated clients.
Bankers said they were now settling for thinner spreads.
Some banks are even lending to top-rated clients at base rates. Banks cannot lend below base rates, expect in categories prescribed by RBI.
With spreads falling, banks are expected to feel pressure on margins in the current quarter.
Easier liquidity has also impacted commercial paper (CP) rates, which cooled off in July.
CPs are debt instruments through which companies raise funds for up to one year.
"CP rates have fallen by 50-60 basis points from a month ago," said Ajay Manglunia, senior vice-president, Edelweiss Securities.
At present, the rate for three-month CPs is 9-9.5 per cent, while the rate for six-month and one-year CPs is around 10 per cent.
"CP rates are expected to stay at the current levels for some time and won't come down significantly," added Edelweiss' Manglunia.
But volumes in the CP market have not risen despite the rates cooling off after almost a quarter.
"Only a few better rated companies that find bank loans dearer after the recent rate increases have been able to tap the debt market for short-term funds," said a bond dealer with a domestic brokerage.
