RBI order a base blow for some PSUs

Oil, power, fertiliser units heavily dependent on short-term bank loans might see costs zoom

The Reserve Bank of India’s (RBI's) instruction to banks to shift to basing their loan charges on a new rate, a base rate in place of the existing prime lending rate (PLR), will hit hard at some public sector units (PSUs) where pricing of products is subsidised.

The shift had been deferred to July 1, on banks’ request. The base rate is to be fixed on the basis of cost of funds and other servicing expenses.

Government-owned oil marketing companies (OMCs), fertiliser firms and state electricity boards, all heavily dependent on short-term bank loans for working capital on account of factors like underrecovery, might have to factor in up to a five per cent increase in their cost of funds in their balance sheets, said bankers.

Banks are also worried about asset-liability mismatch problems if short-term loans are given at the base rate. Thus, banks as well as companies are hoping for some flexibility in such lending in the new regime.

At present, most triple-A rated PSUs get short-term loans much below PLR, at four-five per cent, as they are able to negotiate the lowest rate with banks.

Leveraging from low interest rates, instead of taking term loans for a year or more, the companies have been taking short-term loans every three or six months, thus getting funds at about 4-5 per cent, said bankers. As a result, the proportion of short-term loans in their overall borrowings have been rising, particularly with banks also looking at avenues to deploy surplus liquidity.

For public sector oil marketing major Indian Oil Corporation, short-term lending in the rupee accounts for nearly one-fourth of the total borrowing, according to a company executive.

“With the base rate in effect, banks will have an excuse to lend at a higher rate. However, the cost also depends on how the base rate is calculated. If it is done on the basis of one-year deposit rate, it will definitely impact the cost of funds. If companies are borrowing for three months, they should not be paying interest at rates based on one-year deposits. Also, I don't think commercial paper will be much of an option, because even though it might be slightly discounted, interest rates will be closer to the bank lending rate,” said an executive of IOC.

If base rates are calculated on a six-month deposit basis, there will be a two-2.5 per cent rise in cost of funds. If calculated on a three-month basis, the increase will be about 1-1.5 per cent and on one year, 3-4 per cent, according to the IOC executive.

At Bharat Petroleum Corporation Ltd, India's second-largest refiner, short-term lending accounts for almost half the total borrowing, said a company executive.

Short-term lending has also been a favourite instrument with banks to park excess liquidity.

“Short-term loan pricing is not adequately addressed. Possibly, a rethinking is required. Short-term loans are like money market instruments, so it cannot be linked to other rates. Banks lend in the short term to address ALM (adjust asset liability mismatch) issues,” said Bhaskar Sen, chairman and managing director, United Bank of India.

However, the impact of the base rate on OMCs will also be dependent upon their future working capital, which in turn is linked to the underrecoveries on subsidised products and the mode of providing subsidy by the government. “If the government implements the Parikh committee report (which recommends market-linked pricing), then the problem of underrecovery is likely to be addressed and the need for funds for working capital would come down significantly. Similarly, if the government provides the subsidy in the form of cash rather than oil bonds, then OMCs will not be required to borrow significantly for the working capital needs.” said Deepak Pareek, analyst, Angel Broking.

For fertiliser cooperative major Iffco, too, sub-PLR loans account for a majority of borrowings. While it holds government fertiliser bonds of about Rs 6,600 crore, it has not traded them due to mismatch in yields, according to a company executive. Iffco has been partly borrowing short-term loans at a low rate of interest against some of these bonds with banks.

“We have been getting short-term loans at rates between 4.90 and 5.55 per cent. We also have cash credit limit of up to Rs 5,000 crore for working capital from various banks,” said the Iffco executive.