Banks yet to come out of the high rate regime.
The cost of working capital has not come down for Indian companies, as banks have not passed the benefit of reduction in the key rates. The Reserve Bank of India (RBI) has cut the repo rate (at which it lends to the banks) by 525 basis points to 4.75 per cent from the pre-credit crunch level.
Yet, companies continue to borrow much of their working capital at 12.25 per cent, which is State Bank of India’s (SBI’s) prime lending rate (PLR) and a sort of benchmark. Nearly three-fourths of all working capital loans like cash credit and overdraft are lent at bank’s prevailing PLR.
JSW Group CFO Seshagiri Rao pointed out that the yield on a 10-year government security is 6.23 per cent, while SBI’s PLR is still at 12.25 per cent. “How can it (still) be 12.25 per cent?’’ he asked.
Companies say the reason why banks are unable to reduce interest rates has two aspects to it. One is the ability and the other is intent. With so much money being compulsorily parked through cash reserve ratio (CRR) and statutory liquidity ratio (SLR), company finance managers say banks are finding it difficult to earn a rate of return high enough to compensate. Banks earn very little on these deposits.
Earlier, it mattered less because commercial loan rates were high enough to compensate. But takers at those rates are much less now.
In addition, banks are scared to lend and have been parking their deposits with the RBI, on which they earn 3.25 per cent (the reverse repo rate).
‘‘These deposits are not earning enough to enable them to reduce the lending rates for others (individuals or companies),’’ said Hinduja Group CFO Prabal Banerji.
Banerji says the banks are still to come out of the high-cost scenario. ‘‘For the last one and a half years, they have been lending at high rates, and have not been able to come out of that mindset. They are just trying to earn some extra profits, as their margins come under pressure,’’ said Banerji, noting how some bank CEOs have been saying it would take still more months for interest rates to come down.
Meanwhile, banks’ margins have come under pressure, as they are scared to lend — credit growth has come down from 27 per cent in 2006-07 to17-18 per cent. While bank deposits are growing at 22 per cent.
JSW’s Rao said banks have also lost the appetite for term loans and have become very selective in whom they lend. As cash accruals have dried, banks fear companies may not be able to bring in their promised contribution to the cost of financing a project.
If there was a Rs 5,000 crore project, in good times this was getting funded through Rs 2,000 crore of internal accruals and Rs 3,000 crore of debt. ‘‘Today, banks are not willing to buy this argument, as cash flows have become uncertain,’’ Rao added.
The perception is that big companies are able to borrow at sub-PLR rates, but even these loans have become expensive, as they come with a reset clause. Between 2005 and 2007, term loans were offered to some big companies at a discount of 2-3 per cent to the PLR, but the caveat was that interest rates will be reset every three years.
Assume a company which had borrowed Rs 100 crore in 2006 and got a 2.50 per cent discount on the then prevailing PLR of, say, 10.5 per cent. The effective interest on this loan would be 8 per cent. If the interest rate had to be reset today, the effective rate (PLR of 12.25 minus 2.50 discount), will be 9.75 per cent. Now, this is higher than the effective rate of 8 per cent on which the company had initially borrowed the loan.
Which still leaves the question of why the PLR should be stuck at that level, when banks have more funds than they can handle and the interest-rate regime has been loosened.