The Hindu Business Line : PFC plans floating rate for future loans

POWER Finance Corporation (PFC) proposes to move over some of its future loans to power utilities to floating rate from the current regime of fixed rates.

Sources said that this transition was intended partly because some of PFC's liabilities were also shifting to floating rates.

Most of its international credit lines are on a floating rate basis linked to the London Inter bank offered rate. Only some of its domestic borrowings are on a fixed rate basis. Even these borrowings had early exit options built into the covenants.

Currently, PFC's lending for various schemes are on a three-year reset basis. This implies that the lending rates to borrowers get revised every three years.

But some of the past borrowings were on fixed interest rates for long term. The shift to a three-year reset itself was recent.

As a result, during the last few years PFC has brought down its lending rates progressively in line with its own cost of working funds.

This reduction in lending rates during the last few years was also due to the appreciation of the rupee and the fall in international and domestic rates.

These allowed PFC to cut its borrowing costs considerably. PFC has already brought down its project lending rates to as low as 7.25 per cent for all high-rated corporates and utilities.

This rate is barely 100 basis points over its own cost of raising funds. The sources admitted that in doing so, PFC's spreads had become thin. But they added: "Our business is not spread, but volume-driven."

But even the three-year reset implies that borrowers would be locked during this period into high interest rates. Alternatively, such lending also implies that lenders face the risk of being locked into low rates when interest rates rise.

Accordingly, the sources said, the best option to take care of both lenders' and borrowers' interest rates was to switch some of the lending to floating rates. Other lending conditions, including guarantees by the State Government, would not be changed.

The sources also said that such an option would also be acceptable to some of the syndication partners, mostly large public sector banks and financial institutions.

PFC's large project loans are mostly done through syndication, where it is a usually one or the lead arranger.

The syndicate partners prefer floating rate lendings, especially for some of the large customers.

This was especially since some of these large borrowers have been raising funds at below the prime lending rates of 10.5 per cent.

Floating rate loans are intended to avoid prepayment risks faced by most lenders. Most of the States have been looking for prepayment of some of their high-interest loans by refinancing the same from other financial institutions. PFC has so far not permitted such an exit or allowed the exit only at very high premiums.

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