The Hindu Business Line : Banks do fine balancing on corporate advances

Some of the corporate floating rate borrowings in recent times were priced at a spread over sovereign papers which allowed for automatic repricing. This covered interest rate risks for both borrowers and lenders, the bankers said.

Bangalore , Sept. 12

In a bid to protect net interest margins (NIM) and retain customers at the same time, public sector banks are doing a delicate balancing act on their corporate advances.

Bankers said that the balancing ensured the discounts to the benchmark prime lending rate or BPLR were protected to some of their best rated corporate customers.

Bankers said that many of the corporate customers had drawn term advances in 2003 and 2004 at discounts as high as 300 basis points below the BPLR.

Low interest rates

In fact at that point of time many of the corporate customers had taken advantage of the low interest rates and availed themselves of term loans at rates as low as 7 per cent. With interest rates on the ascent, bankers said, some of the loans needed to be repriced. This was necessitated for protecting the banks' own NIM.

NIM is the difference between the interest earned on assets and the interest paid out on liabilities and capital. Bankers said that the repricing was intended to ensure that the NIM was kept in a band between 3 and 3.5 per cent.

At the same time, the bankers said that none of them was prepared to lose their prime corporate customers to competing financing agencies, or even rival domestic banks.

Repricing

Consequently, they said that the repricing involved ensuring that the discounts remained constant at originally contracted levels.

As a result with each increase in the BPLR, the advances were also automatically repriced, they added. This was in line with loan covenants that allowed for interest resets.

The bankers also said that the repricing also ensured that the pricing for the corporates was at least 100 - 150 basis points above comparable sovereign borrowing rates. The recent Rs 200-crore bond issue by Konkan Railway Corporation Ltd was priced at 8.90 - 9 per cent, with a 10-year tenor, with a call/put option at 5 years. When the issue closed, the five-year sovereign paper was 7.5 per cent.

But some of the corporate floating rate borrowings in recent times were also priced at a spread over sovereign papers.

Model

This allowed for automatic repricing for the banks, the bankers said. Banker said that this would be the model for funding large corporate advances that would be done in future as well. This covered interest rate risks for both borrowers and lenders, the bankers said.

Only in cases of smaller corporates and retail advances, funding was currently done at a premium to BPLR. Bankers said that even in the case of rural non-farm loans, the pricing was done at spreads above BPLR, ranging from 200 to 400 basis points.

This included refinancing of farmers loans from unorganised financiers. It was only in the case of farm loans, where banks were entitled for a subvention of 2 per cent and crop insurance covers were available, the pricing was done at 7 per cent.