Companies may have to pay more under base rate system

Opinion divided, but other sources of finance may also become dearer.

India Inc may have to pay higher interest rates to banks as the base rate system kicks in from July 1.

Bankers expect State Bank of India (SBI) to set its base rate close to 8 per cent. Th rate of other public sector banks is likely to range between 8.25 per cent and 9 per cent. Since no bank will be permitted to give loans below the base rate, large companies, which had been getting loans lower than the benchmark prime lending rate, will now have to pay as much as 200 basis points more, bankers say.

Banks will now be more precise in selecting the premium for risk and tenure, resulting in an increase in the loan rates to the corporate sector, say bankers. “Cost of borrowing will slightly increase, to the extent money is borrowed from the banks. Once we determine a base rate, we will not be able to give a loan to any corporate below the base rate. At this moment, there are some AAA companies who are enjoying a 7–7.5 per cent rate,” said a banker who was a member of the Mohanty panel on the base rate.

“Banks will be more conscious now about their net interest margins, risk and tenure premium, which they earlier were not. They will also be more conscious about various allocatable and unallocatable costs.

The central bank said cost of borrowing for companies may not necessarily rise. “There is some apprehension that the base rate system may raise the effective cost of borrowings,” Deepak Mohanty, executive director of the Reserve Bank of India (RBI), said in Kolkata on Friday. “This is unlikely, because corporates have access to multiple sources of funds and, hence, the effective borrowing rates will be determined by market competition.’’

Mohanty headed the committee constituted by the central bank to review the benchmark prime lending rate system and suggested a base rate to replace benchmark prime lending rate.

CPs dearer, too?
Other sources of finance such as commercial paper may also turn expensive, a section of bankers said.

“The short-term lending rates are more influenced by liquidity conditions in the market. Pricing for commercial paper may harden, reducing the gap between the interest rate for term lending and short-term funding in the form of investment in paper floated by a company due to difference in risk perception,” a senior SBI executive said.

Bankers said while giving term loans, banks carry out internal ratings of borrower and factor in the management quality and business plans, so that lenders factor in more information about borrowers.

“As against this, pricing for the short term in commercial papers, which is investment and not a credit, is done on the basis of external rating. The information available is less. Banks could charge a higher coupon rate for commercial paper, to partly compensate for limited information base and higher risks being taken on the book,” said a senior executive at Bank of Baroda.

Yields in the corporate bond market rose 15-20 bps across tenures in the week ended June 11, as participants booked profits on expectation that yields will rise in the coming week due to the liquidity crunch. Last week, Reliance Industries raised Rs 700 crore through three-month CP at 6.25 per cent.