Business Daily from THE HINDU group of publications
Friday, Jun 08, 2007
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Business Daily from THE HINDU group of publications Friday, Jun 08, 2007 ePaper |
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Interest Rates Markets - Stock Markets Money & Banking - Credit Market Nilanjan Dey
Costly affair Rates have been moving past 15% for some quarters Clients who have taken loans may find it expensive to borrow and invest Uncertainty in securities markets compounding problem
Kolkata June 7 The loans against securities (LAS) scenario is undergoing another round of change, with lending institutions looking at hiking rates in the context of recent modifications in the interest-rate structure and growing uncertainties in the markets. Investors who had lately opted for LAS point out that many of them now have a tough time dealing with revised rates, following decisions by LAS providers to do so. Such moves are to be seen against rates that have risen steadily over the past few months. Capital market circles agree that investors — bank clients who have taken loans — may well find it more expensive to borrow and invest, a likelihood that may discourage a section of them from adding to their leveraged exposure. Rates, sources say, have been moving past the 15 per cent mark for some quarters. This, it is felt, is far too high for them in the present circumstances. In a typical case, an investor who had taken, say, a loan at 13.5 per cent in February may have to shell out 15 per cent at this juncture. Investors can secure loans against approved securities — select stocks or mutual funds are usually permitted — and get the necessary funds for their use. These arrangements require the investors concerned to pay interest at rates that are previously determined, subject to revisions. It is these rates that are increasing, rendering it difficult for common investors to borrow and operate in the market. What is compounding their problem is the uncertainty prevailing in the securities markets. "At 15 per cent it is quite a difficult proposition. You have to pay this to the bank at any rate, even if the transactions you enter with your borrowed money lead to losses," a source close to a distribution firm said, while referring particularly to frequent ups and downs on the equities front.
Decent margin
The idea, therefore, is to profit from the transactions in a way that leaves you with a decent margin — decent enough to meet interest obligations and take home at least some profit. Banking circles are of the view that LAS products are already on the wane, at least temporarily, as some sections are averse to the idea of borrowing at steep rates (after payment of processing fees and renewal charges). LAS volumes, therefore, are declining. It is also pointed out that banks, which are expected to revalue portfolios regularly, have the right to amend rates on the loan facilities by giving prior notice to customers.
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