Mumbai: Banks may not be too happy with excessive liquidity, or money, in the system but Indian firms aren’t complaining because this gives them access to low-cost credit. Banks earn a mere 3.25% by parking excess money with the Indian central bank.
Meanwhile, companies led by the state-owned oil firms are negotiating hard with banks for cheap money. Such firms have also made a strategic shift in their borrowing plans. Instead of going for one-year working capital loans, they are borrowing for three months and rolling over the facility.
Companies need working capital to run daily operations. The cost of a one-year loan could be anywhere between 8% and 12% for a company, depending on its credit rating. But for three-month loans, the rate is 4.5-6.5%.
The prime lending rates of public sector banks—the rate at which they lend to their best customers—range between 11% and 12.75%. However, short-term rates are not linked to the prime rate and anything above 3.25% seems to be acceptable to banks for such loans as they need to cut their own cost. On an average, banks pay at least 6% on deposits.
Companies invite bids for short-term loans and the bank that offers the lowest rate of interest wins the bid. The banks don’t mind because they are flush with funds. Credit growth has slowed to 15.4% from almost 30% in the past few years. A year ago, credit growth in the system was at 25.8%.
Some banks have also revived an old short-term loan instrument, Mibor-linked notes that was introduced in the market about five years back. Mibor (Mumbai interbank offer rate) is the daily rate at which banks borrow from each other.
“The product was always there with banks. But we didn’t push it when the credit growth was very high in the system and banks were short of funds to meet this demand. Now the situation is different,” said a senior official at Punjab National Bank who did not want to be identified.
Mumbai-based Central Bank of India has introduced two-three products addressing this the bank’s old customers, who otherwise hit the commercial paper market or go to other banks to raise short-term loans, said the bank’s chairman and managing director S. Sridhar.
The loans are for 90 days to 180 days and are based on Mibor. The products have daily “call” (buy) and “put” (sell) options, said Sridhar. The product is similar to commercial paper—essentially an unsecured promissory note with a fixed maturity period. It is used to meet short-term debt requirements.
Although the Reserve Bank of India (RBI) has been pushing banks to lend more, bankers concede that credit growth is not picking up. State Bank of India chairman O.P. Bhatt on Thursday said lower credit offtake had affected his bank’s profitability.
Oil cos borrowing cheap
In this scenario, banks are seeking out customers with even cash flows. Oil marketing firms do. “We are very comfortable lending to oil companies as they are cash-rich and solvency is never a problem,” said T.Y. Prabhu, executive director of Union Bank of India. “I think this is a very effective treasury management by public sector companies.”
S.V. Narasimhan, director, finance at Indian Oil Corp. Ltd, India’s largest oil marketing company, said the firm borrows money for three months if its borrowing is within Rs40,000 crore. “If our borrowings go beyond Rs40,000 crore, we will take a six-month loan. We take three-month loans because we want to cover the immediate requirement until September due to dividend and advance tax payment.” Till 30 June, India Oil’s borrowings were Rs33,678 crore.
According to Narasimham, the rate of interest on a three- month loan is around 4.5% while that for a six-month loan is around 5%. The rate jumps to around 12% for a one-year loan, according to bankers.
Taking a leaf out of the behaviour of the state-owned oil firms, private sector companies, too, have begun asking for bids from banks and auctioning short-term loans.
“Yes, it is happening,” said Prabal Banerjee, group chief financial officer of Hinduja Group. According to him, depending on the credit worthiness of the company, one-year loans can be raised at 8.5-9%. The rates comes down to 6-6.5% for three month loans. “Corporations are taking advantage of this 2.5% arbitrage opportunity and rolling over their loans after three months.” There is a caveat, though. There may not be adequate funds in the system after six or nine months because the government needs to borrow heavily to bridge its fiscal deficit. “It will be a mistake if short-term finance is used for long-term working capital or capital expenditure. Corporations have to ensure that they have enough cash in hand to pay their obligations when the liquidity reduces, and they are not able to roll over their loan,” Banerjee said.
Although the system is flush with liquidity now, the government’s Rs4.5 trillion borrowing programme is sure to crowd out private investments. RBI, too, will seek to reduce liquidity because it stokes inflation. When that happens, rates will rise and corporations will not dare to roll over loans.
Utpal Bhaskar in New Delhi contributed to this story.