Why The Divide

Being a developing country and faced with scarce resources, concessional finances were made available to financial institutions. Most of the funding was provided by the Reserve Bank of India and by multilateral lending agencies. Banks could not take up long term funding as their asset base was geared for short term lending only.

Over the past few years financial institutions have been entering new areas of activities including merchant banking, stockbroking, and mutual fund business. They are now hopeful of entering into the business of full fledged forex dealership once regulations permit. While earlier the institutions were mostly funding government infrastructure projects, they are now financing private sector projects as well. Funding support from the government has slowed down with many institutions now looking at raising their own resources. There are possibilities of the FIs now raising their own `on tap' bonds.

 

Till recently the financial institutions were declaring only one lending rate for long term financing. Recently ICICI has declared a medium term PLR of 13.5 per cent as a separate rate from its long term lending rate of 15 per cent. The other institutions may follow.

The profile of commercial banks has also changed over the past few years. Some of the larger public sector banks like State Bank of India and Bank of Baroda are lending long term.