Corporates reacted cautiously yesterday to the cut in prime lending rates by financial institutions and the introduction of a new rate of medium-term borrowings at 13.5 per cent by the Industrial Credit and Investment Corporation of India (ICICI). However, industry associations were more optimistic about the probable impact of the downward trend in interest rates.
The Federation of Indian Chambers of Commerce and Industry (Ficci), hailed the lowering of the PLR floor as a welcome step. Interest in making fresh investments will now be revived with the establishment of a reasonable and competitive credit cost, stated the chambers spokesman.
The Confederation of Indian Industry (CII) predicted that the cost of funds would come down substantially following the ICICI move, enabling industry to improve project viability, while the Associated Chambers of Commerce (Assocham) said the FIs decision to reduce their PLRs was a welcome step.
However, the Assocham statement also urged the FIs to discard their fear psychosis and be more willing to take risks while extending credit.
Corporate sources said a medium term rate of 13.5 per cent was welcome, but ICICI was unlikely to lend at that rate. After adding the mark-up and tax, the rate could easily come to 15 per cent, they pointed out.
At 15 per cent for 30 months, I have other competing sources of finance, like debentures and forex loans. ICICI is not the only one, said Indian Rayon & Industries Ltd vice-president, finance, D D Rathi.
The finance manager of a leading pharmaceuticals company said the cut in PLR would only benefit companies with good ratings, since banks are not willing to lend at lower rates to other companies. The PLR cut is certainly sustainable as there are sufficient funds in the banking system, he said.
Videocon board adviser S K Shelgikar said: ``These days, costing has nothing to do with pricing. The cut in PLR was a result of demand and supply and there can be no immediate impact as a result of the cut. Most projects are long gestation ones and there can be an impact only in the long term if the rate is sustained. But who can predict that the rate will not be raised again three months down the line? The policy makers should actually decide to either leave every thing to market mechanisms or to control every thing.
However, corporates agree that term lending will now become more competitive and the earlier distinction between short-term financiers and long-term development financial institutions is rapidly fading.
The reduction in PLR by major FIs is the second recent sweetener for corporates after the credit policy, which eased restrictions on working capital finance. The slack season credit policy had done away with the maximum permissible bank finance to corporates and also abolished consortium lending.