The Invisible Hand

The first rumblings of dissent are coming through from the financial markets. Sections that were, till the other day, confident that a cheap money era was here to stay for another six months at least, now confide that their hand was forced by none other than the finance ministry.

Apparently, some wise heads in the finance ministry were reading the newspapers. And there it was. Yields on treasury bills plummeting, of banks lining up before the Reserve Bank of India windows to buy government securities and of course, of banks cutting back their prime lending rates like fleas in a circus.

 

Yet, day in and day out industry captains complained that credit was still too costly. Serious commiserations with bankers followed and some bright spark suggested that though short term interest rates had definitely softened, the tough nut to crack was long term rates. For good measure, someone threw in catch phrases like industrial revival delayed, and of course, lower index of industrial production growth. So, the word goes, the finance ministry got into the act of softening long term interest rates. The rest is history.

Suffice it would be to say here that Industrial Credit and Investment Corporation chief is suddenly getting the chills, one month after the institution ventured into short term lending at a rock bottom 13.5 per cent. The Industrial Development Bank of India is said to be having trouble with its 13.5 per cent Rs 1,000 crore bond issue. In the same market, however, Housing Development and Finance Corporation (HDFC) has cut back mortgage rates by another half-a-percentage point.

The fact of the matter is that it is still too early in the year to be writing dirges for cheap money. A moments reflection on the post-credit policy liquidity situation should suggest that things are pretty much comfortable. Rates at the short end have tumbled not only for government paper but for corporate paper as well. Three month government paper is going for 7 per cent and six month blue chip corporate paper is available for 11 per cent. Reliance Capital, a triple A rated non-banking finance company from the Reliance stable, in fact, was flooded with bids for Rs 500 crore when it had floated only a Rs 100 crore, five-year issue at 15.5 per cent.

Now it is but a fact of the domestic market that it makes distinctions between a manufacturing company, an NBFC, and others. A two percentage point premium is the least an NBFC has to pay for its lineage, partly reflecting the higher risk exposure involved in NBFC operations. That factored in, even five year paper should be available at around 13.5 per cent. Indeed, public sector IPCL is floating a Rs 450 crore, five year issue priced between 13.75 to 14.25 per cent. Subtract the subjective component of IPCL being a blue blooded PSU and still the pricing fits in comfortably in the long term yield curve.

The simple fact of banks picking up paper at around 14 per cent should nail the fact that their cost of funds is not inching higher, a reason that should concern the corporate sector. It is not.

What of ICICIs discomfiture? The fact is that short term money has become a little tight in recent weeks. This followed from the RBIs decision to retain oversubscription in the last state loan auction. To the extent ICICI is doing back to back deals, that is pricing short term lending off the cost of short term funds raised, KV Kamath is only talking sense that ICICI may have to review lending rates if costs do not revert to earlier levels.

The flip side however is that with the latest tranche of state loans, 90 per cent of the states budgeted borrowing programme is out of the way. In fact, one-thirds of the central governments borrowing programme is over and done with. By September, three-quarters of the programme should be through. There should be little, if any, evidence of government crowding out corporate borrowings.

So why is the corporate sector cribbing? Thereby hangs the tale: It should be obvious from the slew of bond issues in the pipeline that those corporates who can raise money are doing so. Those that cant, complain.

The dichotomy between banks liberally picking up five year exposures at 13.5-15 per cent, but refusing to lend directly at 14-14.5 per cent should be disconcerting for the larger part of the corporate sector. Worse, there is also the fear of being crowded out not be the government this time, but by the more savvy corporates.

The larger reason, one suspects, is that realisation has dawned on the corporate sector that banks have become too powerful. Abolition of maximum permissible bank finance, for example, was topmost on the corporate agenda, and for very valid reasons. Forty five days have elapsed since the credit policy scrapped MPBF. Only two banks have evinced interest in shifting to alternative methods of evaluating bank limits. The inertia is partly on their own account, but largely because the corporate sector is wary of the repercussions that will follow if their banks choose to shift. For if banks take upon themselves the discretionary element in fixing bank limitswith the attendant risks they will ask questions.

Banks will ask for business plans and financial projections. Most probably, the kind of stuff that goes for business projections now will be put under the microscope as banks question each and every assumption. God forbid, they may even ask for specific details in the balance sheet or even question management decisions. The corporate finance directors never ending nightmare is that banks may even cut back on lending limits.

And hence the furious attempts at getting New Delhi to bear upon the banks to do something. But the markets have a poor opinion of New Delhis wisdom; and they have a habit of making sure that sections that do not deserve cheap credit will not get it, irrespective of what they do.