The Hindu Business Line : Banks halt deposit-based lending to corporates

The banks resorted to this step after they discovered that some corporates were taking advantage of intense competition and tight liquidity situation.

In the last few weeks, several corporates have placed 90-day deposits with banks at rates between 7.75 per cent and eight per cent. The bulk deposits were mainly by corporates in the technology and petroleum, and recently, from the steel sectors.

The rates offered, usually through the bid route, were higher than what is currently being offered to retail deposits.

The amounts involved in such big-ticket deposits are in excess of Rs 50 crore.

With prevailing rates of 7-7.5 per cent in the call markets, bankers' pitch for the bulk deposits was in anticipation of attractive spreads.

Bankers said that despite the short-term placement, the funds are actually rolled over 90 days.This gives them access to medium-term bulk resources. It was why they were prepared to pay higher rates on the funds.

However, some of the corporates were also taking advantage of the situation by drawing short-term loans at rates lower than their bulk deposit rates.Some had even drawn at rates as low as 7.25 per cent. In the process, they were earning spreads as much as 0.5 per cent.

This is not an "acceptable situation," according to high-level bankers.This essentially means that the banks themselves would be incurring losses in such forms of corporate lending.

Accordingly, bankers said they were now monitoring corporates placing bulk deposits with any of them through informal channels to prevent arbitrage operations.

The bankers also said that some of the corporates were also operating through the collateralised borrowing and lending obligations (CBLO) markets for maximising earnings through treasury operations.

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