Banks Lure Away Firms With Low Term-Loan Rates

The entry of commercial banks into term-lending is gaining momentum. This is leading to greater blurring of the dividing lines between financial institutions and commercial banks.

Banks attract corporates for term-loans by offering marginally lower rates of interest of about 50 to 100 basis points than the rates of financial institutions. The PLR of commercial banks is lower than that of FIs. Bank of India (BoI) has extended term-loans to 60 customers in the public and private sectors. Bank of Baroda (BoB) said that approximately 20 per cent of its lending activities were of a long-term nature.

Some of the corporates that have opted for term-loans from commercial banks include Steel Authority of India (Sail) and National Thermal Power Corporation (NTPC) in the public sector and Associated Cement Companies, Larsen & Toubro, Tisco and Telco in the private sector. The RBI norms were relaxed sometime back by raising the exposure limits of banks in term-lending to Rs 500 crore from Rs 200 crore. Prior to that banks participated in term-lending, however, only with all India development financial institutions. Banks are also lending to infrastructure projects, particularly in power and telecommunications, and to the priority sector. For power projects the limits were raised to Rs 1000 crore. The banks exposure limit are limited to 100 per cent for fund based lending and 50 per cent for non-fund based exposures.

 

BoIs general manager (credit), H J Mehta, stated that lending is not only to corporates in India but, to joint ventures by Indian partners abroad, through the banks overseas branches.

The banks giving not only rupee term-loans but are also foreign currency loans through external commercial borrowings (ECBs).

Bankers say that term-loans carry a mismatch and each bank would have to decide the extent of mismatch it is comfortable with. This would necessitate that the banks would consistently monitor maturity patterns and take term lending to manageable levels.

However, according to BoB general manager (credit), A R Kher, while the bank would prefer not to block large funds for long periods of time, there is not likely to be a problem on account of asset-liability mismatches as the long term loans would be offset to an extent by the banks time deposits even after meeting of reserve requirements.