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Companies to pay more for loans

April 18, 2005 09:52 IST

Corporate loan rates are expected to go up by at least 25-50 basis points, with yields on government securities rising by as much as 42 basis points in the current financial year.

Bankers are readying to offer rates that are 25-50 basis points higher for corporate loans without changing their prime lending rates.

In other words, the spread below the PLR will shrink. For instance, a company that has been offered a loan 3 percentage points below a bank's PLR may see the loan rate revised to 2.5 percentage points below the PLR. One basis point is one-hundredth of a percentage point.

The prime lending rate is the rate at which banks are expected to lend to their prime customers. However, all prime customers now raise loans at sub-PLR. The average PLR of public sector banks is 10.25-10.75 per cent.

The credit head of a state-owned bank said: "Sub-PLR rates will go up in the next 2-3 months since interest rates in the medium-term are hardening. Earlier, our perception was that interest rates would be neutral for some time. However, that is not the case any more."

The sentiment on interest rates has become bearish just a fortnight into the new financial year, with the yield on the benchmark 10-year government security paper veering around 7.10 per cent.

"The recent rise in yields on government securities will affect lending rates soon," said RVS Sridhar, vice-president and chief dealer, UTI Bank.

"Banks that were quoting 3 per cent below PLRs will now quote 1.5-2 per cent sub-PLR. If the trend in the government securities market continues, even retail loan rates will go up," said a Bank of India executive.

The 10-year benchmark paper tested similar levels in 2004. However, the situation is a bit different now with a large government borrowing programme looming.

The yield on 10-year benchmark security rose to 7.28 per cent in November 2004 but subsequently came down to 6.48 per cent in February 2005.

The yield on the 5-year government paper also touched a high of 6.88 per cent in November 2004, but softened to 6.38 per cent in February 2005.

Since then, it has risen to 6.65 per cent. With the yields of government securities and corporate bonds going up, low interest rates on loans were becoming unsustainable, added Sridhar.

The loan market will also have to adjust to the rising yields in the bond market; otherwise there will be arbitrage with all corporate borrowers preferring loans to bonds.

Credit grew in 2004-05 by 30 per cent (Rs 266,849 crore -- Rs 2,668.49 billion) to a total outstanding figure of Rs 1,141,701 crore (Rs 11,417.01 billion). The growth in credit is expected to be very healthy in this financial year, too, thereby putting pressure on liquidity.

With the government's borrowing programme of Rs 83,000 crore (Rs 830 billion) in the first half of this financial year being 41 per cent higher than that of the past year, it is feared that even the liquidity of Rs 60,000-70,000 crore (Rs 600-700 billion) currently in the system may dry up. The volatility in global oil prices is yet another worrying factor.


Costlier borrowings

Bank Moves
Bank are readying to increase rates by 25-50 basis points for corporate loans without changing their PLRs

PLR Case
A company that has been offered a loan at 3 percentage points below a bank's PLR may see the rate revised to 2.5 percentage points below the PLR

The Trigger
Yields on government securities have gone up by 42 basis points; a large government borrowing programme is looming

Poornima Mohandas in Mumbai
Source: