Stepping Up The Interest

The revised guidelines are an improvement on the earlier norms in that they are more specific and comprehensive on many issues, of which pre-payment is one. What has brought cheer to the corporate sector is a very specific provision in the norms that borrowers will continue to be permitted to pre-pay outstanding liabilities on existing loans through the re-finance route, where fresh monies are raised at lower rates of interest to pay off high-cost borrowings that may have been incurred earlier.

Of course, there are caveats. One is that pre-payment will be allowed subject to the condition that there is no change in the maturity eventually. The other stipulation is that decisions in such cases will bedecided by the MOF on a case to case basis. But in spite of these conditions, both corporates and banks that are arranging the deals are optimistic that the ministry will grant more leeway than ever before for pre-payment in the case of a re-financing arrangement. In fact, there are expectations that it may even relent as far as the conditions laid down for maturity are concerned.

 

Small wonder, then, that the May 1996 guidelines have seen a flurry of activity amongst blue-chip corporates with strong cash flows, as far as the step-up structure is concerned. While Telco has raised $ 72 million for its ongoing expansion and modernisation programmes, L&T has gone in for a $ 115 million loan to part-finance the import of capital goods and fund the companys captive power plants (see table). A third, ACC, is currently tying up its $ 55 million loan with a step-up interest facility. Many more corporates are expected to take this route.

Although this structure carries different interest rates that increase progressively during the tenure of the loan, the average rate of interest works out to the same as a comparable uniform interest structure loan. Why then is this structure, which could impose a greater strain on the borrowers cash flows at the fag-end of its maturity, catching on in terms of popularity?