The Hindu Business Line : Corporates draw down on credit lines to avert rate risks

Top bankers said that they intend pushing the benchmark prime lending rate by at least 50 basis points after the Reserve Bank of India’s inflation combat plans are finalised.

Currently, the benchmark prime lending rate (BPLR) ranges between 12.75 per cent and 13.5 per cent.

They said that the drawdown was largely to avert interest rate risks, particularly infrastructure projects.

The drawdown, the bankers said, was one of the major reasons for the increase in credit offtake since the beginning of this financial year. Credit offtake has grown by Rs 18,500 crore since the beginning of this fiscal. During the corresponding period of 2007-08, credit offtake contracted by Rs 40,435 crore.

Power projects

Bankers said that the drawdown was mainly by some corporates implementing power projects.

The bids for the projects were made on the basis of the lowest tariffs quoted.

Some of the corporates had made bids for the power projects, including ultra mega projects, in anticipation that interest rates would not exceed 10 per cent. A spike in interest rates implies tariff risks as project promoters would have to absorb the cost escalation suffered on account of rising interest rates.

Drawing down the sanctioned borrowing limits and parking the same in bank deposits were essentially to hedge against interest rate risks.

The bankers said that corporates were parking the funds in bank deposits and other liquid assets. These included short-term time deposits and treasury bills. Bank deposits, as a result, have increased by Rs 60,040 crore this year, according to the RBI’s weekly statistical supplement. During the corresponding period of last year, the increase was just Rs 31,436 crore.

Bankers said that part of the increase in bank deposits was also contributed by mutual funds, who parked funds in deposits, anticipating redemption pressures.

Hardening of yields

The bankers said that the drawdown started with the hardening of yields since the beginning of this year.

For instance, the yield on the 91-day Treasury bill at the beginning of this financial year was 6.94 per cent. At last Wednesday’s auctions, the yield was 8.06 per cent. Spreads, on large corporate borrowings, as a result hardened. Currently with the ten-year yield to maturity (YTM) at 8.61 per cent, the spreads for long-term borrowings was about 250 basis points or in excess of 1 per cent.

Besides, they said, few corporates had plans to raise funds from the global markets.

This was because spreads over the London Inter Bank Offered Rate was about 400 basis points, as against the RBI’s prescribed ceiling of 350 basis points.

In addition, borrowers are also facing exchange rate risks with the rupee depreciating about 7.5 per cent against the dollar since the beginning of this year.

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