The Hindu Business Line : Banks tightening corporate loan norms

Banking sources said that none of the corporates were presently keen to lock into floating rate interest loans or short-term loans. Corporate aversion for floating rates stems from the recent hardening of yields. Most of them had opted for floating rate loans in a regime of softening rates. Now, some of them want to lock into fixed rates at the current low levels.

Bankers said this would still mean that for the top corporates, the cost of term funds would range between 6.5 and 7.5 per cent. Bankers added they had few options other than lending even on these terms. The alternative would be to park in government securities.

Instead, bankers have now begun inserting new conditions into the loan covenants, effectively giving them a call option at the end of three years. This would mean that while the tenure of the loan would be five or 10 years, bankers reserved the right to call back the loan at the end of three years, even if it was classified as a standard asset.

One banker said, "These modified covenants will protect us from interest rate mismatches." Alternatively bankers said that most of the new loans carried a three year reset clauses. This would imply bankers reserved the right to alter the lending rates at the end of three years, without any call back.

But most bankers hardly see any substantial interest rate spikes warranting for any major upward revision of the PLRs. PLRs currently range between 10.5 per cent and 11.5 per cent.

These rates were expected to remain steady for some more time despite the recent 0.25 per cent hike in the reverse repurchase rate, they said.

One of the major reasons for this expectation was that weighted average costs of working funds for most banks were down to about 4.5 per cent. Besides, bankers said that this year most of them expected to realise substantial recoveries of at least Rs 400 crore each.

This would help them bring down their gross non-performing assets and at the same time improve the cost of working funds. Further, accretions to NPAs were also low, as was evident in the second quarter results.

Consequently they said there were still intent on chasing good quality credit assets. Funds for lending raised out of liquidation of the investments, leading to a further hardening of yields.