Quicker Money, Cheaper Money

Money for firms ...

The corporate sector, without exception, are likely to be pleased with the steps taken to speed up credit delivery. This includes non-banking finance companies which have been, at last, recognised as a legitimate business activity ans can be funded as such by the banks. The requirement for forming consortiums beyond limits of Rs 50 crore has been dispensed with, leaving the banks and their borrowers to work out the modalities for funding limits and disbursal systems. As long as banks stay within their own prudential norms regarding exposure limits, they have been allowed to fund companies on their own or with other banks.

 

More important is the decision to do away with a pre-determined method of calculating maximum permissible bank finance. Banks have now been given the freedom to develop their own methods to calculate the maximum amount that can be lent to a company, which then have to be approved by their boards.

This is expected to benefit the large, top-rated corporate groups, who will be able to access higher limits from banks by arguing that the current, out-dated norms do not satisfy their fund requirements. Initially however, players expect that the old stringent norms of calculating MPBF will continue to be used by bankers to keep some tab on the levels of credit being disbursed to their less than prime customers.

Indeed, companies have other reasons to be happy with the policy changes. Reducing the minimum tenure of commercial paper from 90 days to 30 days will help firms take greater advantage of liquidity in the banking system. So far, corporates have not benefitted from seasonal inflows of liquidity in the system. But now with a 30-day instrument, companies will have access to cheaper short-term funds as these funds can be priced off the inter-bank rates. For banks, this will also make commercial sense as they will be able to gain a higher spread by lending money via 30-day CPs instead of buying short-term treasury bills or simply parking the money in the call market.

Another fundamental change in corporate funding is that banks have been allowed to lend upto 5 per cent of incremental deposits to companies against shares. This variant of bridge finance but with some security for the banks) can help kick-start many projects which are stuck because of the promoters inability to raise equity from the market. So the equity markets could witness an inflow of Rs 3,489 crore - either in the form of direct bank investment in shares or by way of

funding promoters equitycontributions to projects.

... at a cheaper price

The money available to corporates apart from being delivered more rapidly, will also come at a cheaper price. By lowering the interest rate on deposits upto one year by 100 basis points, the RBI has ensured a similar reduction in the the final cost to companies, assuming banks maintain their spreads.

Removal of reserve requirements will also, theoretically at least, reduce the marginal cost of funds. But this may have little impact at the moment as banks rarely resort to the inter-bank money in search of funds.

By de-linking bonds and debentures from the banks five per cent cap, companies have been given an additional route of raising funds by placing such instruments with banks. Though till now, corporate debentures have yielded higher returns for banks than loans, PSUs whose paper did not fall into the cap have been able to raise money through debentures at rates comparable with loans. Now with the banks demand ceiling abolished, companies may be able to place debentures at a lower rate too.

... with more options

Another reason for corporate cheer could be because firms have been allowed to hedge foreign exchange risk for periods of over six months. So far, hedging was only possible on proof of an underlying transaction but the central bank has now allowed importers and exporters to book forward covers beyond six months on the basis of business projections and past performance. This will help create a long-term market in hedge instruments and aid firms in better risk management.

Such risk management tools should also be appearing on the domestic markets before long. With reserve requirements on inter-bank deposits abolished, the way has been paved for a long-term rupee yield curve to emerge. This will help banks launch many rupee-based interest rate derivatives to help companies manage their interest rate exposures. First off the block are likely to be forward rate agreements which can help firms lock-in their interest costs.

Deepening the markets

While removing reserve requirements will spur on the creation of a long-term rupee yield curve and stop the fortnightly disruption in the call market, there are other changes made for the benefit of market players. Allowing repos across the gamut of government securities as well as allowing some non-banks like the financial institutions to do reverse repos will help deepen the market, though there seems little reason why the central bank has not extended this facility to other intermediaries which have constituent SGL accounts with banks. This would have not only deepened the market but also widened the investor base.

The markets have also been introduced to a new signalling mechanism. The bank rate, which had lost relevance, has been remodelled and linked to refinance rates as well the the minimum deposit rate. By concurrently introducing a general refinance facility linked to the bank rate, the RBI has introduced a way in which to make rate signals to the financial community. It also marks the beginning of a process to move from sector specific refinance limits to an overall one for banks.]