Refiners give 11.5% to oil firms on 1-year deposits

Issue bonds and debentures as bank funding dries up.

State-owned oil refiners, which are finding it hard to borrow more from commercial banks, are diversifying their fund sourcing. These refiners are now accepting corporate deposits from cash-rich oil companies and issuing them bonds and debentures.

This has put Indian Oil Corporation (IOC), Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation (BPCL) — the three state-owned refining and marketing companies — in direct competition with banks as they are offering a much higher interest rate of 11.5 per cent for one year. The cash-rich oil firms that are depositing money with these refiners are Oil and Natural Gas Corporation (ONGC) and Oil India.

The refiners’ borrowings in the first five months of this financial year have already crossed last year’s levels owing to higher crude oil prices and increased demand. Bank loans, however, still account for a larger share of their borrowings. However, oil companies can lend only up to 25 per cent of their total deposits to any single borrower.

“We are diversifying our borrowing sources. We recently started taking deposits from oil producers and issuing debentures to raise a few thousand crores,” said a top official with IOC, which quoted an interest rate of over 11.5 per cent for deposits of Rs 1,000 crore from ONGC a couple of weeks ago.

Oil India also deposited Rs 200 crore with another state-owned refiner HPCL at 11.80 per cent. “We would’ve got around 11.7 per cent on bank deposits,” said Oil India Chairman and Managing Director M R Pasrija.

IOC, BPCL and HPCL are going through a financial crunch as they sell petroleum products at below production costs. The companies have also exhausted all the oil bonds they got from the government to partly compensate for the revenue losses on retail sales, and are not expected to get new bonds till Parliament clears it in the next session scheduled to begin on October 17.

As a result, the companies’ borrowings have gone up significantly. IOC currently has borrowings of around Rs 45,000 crore, up from around Rs 35,000 crore at the end of March 2008. The company’s Chairman and Managing Director Sarthak Behuria said recently that borrowings would go up to Rs 58,000 crore by October-end as the company borrows more to import crude oil it requires for its refineries. HPCL’s borrowings have risen to Rs 25,000 crore currently from around Rs 19,000 crore at the end of March 2008.

IOC, BPCL and HPCL have been borrowing at a rate of 6.5-7 per cent at the beginning of this year. However, the interest rate on recent loans are over 11 per cent, IOC Finance Director SV Narasimhan said earlier this week.

The companies are also issuing debentures which various institutions such as mutual funds are buying. “We are doing all we can to raise funds for our daily operations,” said BPCL Finance Director S K Joshi. IOC also issued corporate bonds on August 28 after three years. It raised Rs 1,500 crore through the bond issue, five more than it had initially planned.