The Hindu Business Line : Banks offering discounts to BPLR; credit offtake subdued

Bangalore, April 14 With credit off take remaining subdued and headed to becoming worse in the lean season, banks have begun increasing the discounts to the benchmark prime lending rate.

Currently the benchmark prime lending rate ranges between 12.5 per cent and 13.25 per cent, among the public and private sector banks in the country. The discounts currently on offer range 100 and 200 basis points. The discounts were despite the BPLR drop by some banks between 25 and 50 basis points three months ago.

Among the corporates that had obtained competitively priced loan funds included power entities such as Maithon Power Limited, a 74:26 joint venture between the Tata Group and the Damodar Valley Corporation. Bankers said that the loan of Rs 3,115 crore lead-arranged by State Bank of India, to Maithon was priced around 10.25 per cent. Besides, other corporates such as Rural Electrification Corporation also managed to rise at even finer rates. REC raised Rs 1,000 crore at 9.5 per cent, partly due to the sovereign ownership.

Even lesser rated corporates are raising funds at discounts to the BPLR. These include the Lanco group that is implementing the 1200-mw Udupi Power Project. Banking sources said that Power Finance Corporation, which is the lead arranger for the debt funds, amounting to Rs 3,440 crore loan at 11.25 per cent. The pricing, however, is not on the corporate risk. Instead, bankers said that the funding was done on a project recourse basis, where the cash flows are supported by a guarantee from the Karnataka State government. Currently Karnataka is rated at “AA-” on the strength of the guarantees.

Liquidity overhang

Bankers said that the discounts were largely on account of the liquidity overhang. The liquidity overhang was evident from the large Rs 1.7 lakh crore of outstanding Market Stabilisation Scheme securities and bank cash balances with the Reserve Bank of nearly Rs 2.75 lakh crore.

As a result, bankers were now beginning to chase risk weighted assets. The chase was mostly for rated assets. This was because Basel II norms have come into effect for the large banks. For the remaining banks, the regime is expected to come into effect only from this financial year. Under the norms, loans above Rs 10 crore are expected to be rated by a credit rating agency. The threshold drops to Rs 5 crore from the next financial year onwards.

Under the Basel II risk weight mapping, AAA rated loans would have a risk weight of just 20 per cent. This implies that for every Rs 100 advanced, the bank would need to set aside only Rs 1.80 as capital funds. This translated into lower pricing of loan fund for well rated corporate borrowers.

Bankers said that despite the low pricing of the loans, banks would still earn attractive spreads of over 3 per cent on their weighted average cost of working funds. Currently, the weighted average cost of working funds is estimated at about 6.5 per cent. Investments in the government securities earned spreads of barely 0.5 per cent, the bankers said. As a result, banks have lost interest in short-dated papers.

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