Oil companies take credit flow to positive zone

The banking sector -- which typically sees credit contraction in the initial months -- has managed to buck the trend and has added nearly Rs 16,000 crore of advances in the first seven weeks of the current financial year thanks to the demand from the two sectors.

With oil prices rising, local marketing companies (OMCs) -- Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum -- have had to resort to more borrowings to tide over the liquidity crunch that was accentuated by the lack of retail price increase.

As a result, IndianOil had to borrow around Rs 6,000 crore from banks in the first two months of the financial year, taking its total borrowings to over Rs 41,000 crore. While company executives declined to disclose specific numbers, they said in the corresponding period last year borrowings were much lower.

Similarly, another Hindustan Petroleum nearly doubled its borrowings to Rs 2,000 crore during the first two months of 2008-09, a company executive said. Bharat Petroleum declined to disclose numbers saying it had entered the silence period ahead of its fourth quarter results on June 17.

For bank, the he exposure to oil companies is in two forms -- through investment in the oil bonds and also as loans. The bonds were issued to the government to OMC to partly compensate for selling auto and cooking fuel below international price.

A senior SBI executive said that the state-owned OMCs, which are big ticket clients, have not seen an increase in lending rates despite the adverse market conditions for them.

"In normal course a company would have seen an increase in interest rate. But due to our relationship and the fact that these are blue-chip public sector companies we have not increased rates," a banker said.

"It's a multi-dimensional relationship that we have with oil companies," said a public sector bank chief. He pointed out that besides being major borrowers, the oil companies also placed deposits -- some of which are bulk deposits attracting higher interest payment.

While higher under-recoveries and liquidity pressure offer a large business opportunity for banks, they also have to look at cost benefit implications for extending such advances, a banker said. Lending rates for working capital and short-term loans are in the region of 12-12.5 per cent now, compared to 10-11 per cent a year ago.

With the Reserve Bank of India opening special windows for oil companies to sell their bonds and buy foreign exchange, the liquidity situation is expected to ease in the coming weeks. This will reduce the pressure to borrow short-term from banks.

"The short-term borrowing will not go up now as RBI has opened a window to provide liquidity for oil bonds," said Hindustan Petroleum director finance P Mukherjee.

Banks, however, still see an opportunity with the central bank easing the single borrower exposure limit for the OMCs from 15 per cent to 25 per cent. In special cases, this can go up to 30 per cent of a bank's capital.