Most public sector banks' prime lending rate (PLR) or benchmark rates range from 12.75 to 13.25 per cent. The PLR of ICICI Bank [Get Quote], the country's largest private lender, is 15.75 per cent.

In the first three months of this fiscal, most blue chips could access loans at a maximum of one to two percentage points below the PLR. Today, short-term loans (that is, for less than one year) for such companies are available between 7.5 and 9 per cent.

In the new supply-demand dynamics, many large companies that are in a position to negotiate are accessing short-term loans at rates that are even lower than working capital loans, which are priced closer to the PLRs.

A senior banker with a large public sector bank said oil companies like Bharat Petroleum Corporation Ltd [Get Quote] (BPCL) and Hindustan Petroleum Corporation Ltd [Get Quote] (HPCL) are accessing short-term loans at 7.5 to 8 per cent.

"The gap between the rate at which short-term loans are provided to companies and the benchmark rates has widened over the past three months ago. The gap had narrowed substantially in the early part of the current year when rates for AAA-rated borrowers had touched double digits following a series of PLR hikes," said Bank of India [Get Quote] (BoI) Executive Director K Kamath.

Added A C Mahajan, chairman of Allahabad Bank [Get Quote]: "Three months ago, we were lending to companies with rising interest rates in mind, and now we are lending with a belief that there is no likelihood of rates hardening."

PLRs of banks have increased 300-400 basis points in the past year as the Reserve Bank of India (RBI) increased the cash reserve ratio, the proportion of cash deposits banks must keep with the central bank, by 200 basis points to 7 per cent, raising banks' cost of funds.

Short-term rates as low as 8 per cent barely cover the costs for those banks that have at least half their deposits in the form of current and savings account balances, which cost 2.8 to 3 per cent.

Bankers do not see anything wrong in lending to large companies at such low rates.

They argue that it is better to recover at least the costs - cost of funds plus cost of capital - rather than not lending at all and bearing the burden of the cost of funds.

Banks' deposits are swelling with almost all of them offering peak interest rates of 9-9.5 per cent on deposits of one to three years.

Additional reporting by Shriya Bubna & Rajendra Palande