The Hindu Business Line : Banks trim discounts on corporate loans

But some, like ICICI Bank, have preferred to be cautious. Ms Chanda Kochhar, Deputy Managing Director, said: "It is still the slack season and rate revisions, if necessary, can wait for the peak season."

Yet, bankers are with the escalations in costs of working funds to borrowers.

Costs of working funds have increased for the banks after the hike in deposit rates in May.

Deposit rates after the hike in May are in the 6.75-7.5 per cent range at the long end (3-5 year tenures).

At the short end, for tenures ranging from 15 days to one year, the term deposit rates range from four per cent to six per cent for both private and public sector banks.

Besides, most of the banks that have tapped the bond markets for raising tier two capital have found price expectations high. Accordingly, most of the entrants have priced their issues at close to nine per cent. This has resulted in pushing up the weighted average cost of working funds.

These cost increases are quietly being passed on to the borrowers. Till about a year ago, borrowers were in a position to raise term funds at steep discounts to the BPLR, as high as 400 basis points to the benchmark rates.

But the discounts have shrunk. It is now 100-150 basis points below the rates for triple AAA rated corporates.

However, bankers said that many of them had also hedged themselves well lending at steep discounts to corporates, because only a very small component of the term loans are at fixed rates.

A major component of the term advances comes with covenants with three-year reset clauses or are on floating rate loans.

Many of these reset covenants are linked to Government security yields or to 364-day Treasury bill yields.

The 364-day T-bill yield at the last auctions was close to 7.10 per cent. A year ago, when bankers were asset chasing, the 364-day T-bill was 5.60 per cent. For AAA corporates, the spreads were about 150 basis points over this benchmark.

For long-duration project lending, the benchmarks used were the 10-year yield to maturity. This yield is currently close to eight per cent.

Therefore, bankers said, as the benchmark rates keep rising, the lending rates will also keep rising - the flipside being that as the benchmark rates retreat, borrowers also stand to benefit.

Accordingly, the effective resets would ensure that the net interest margins were still comfortable.