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Cost of money to rise for India Inc

Tamal Bandyopadhyay

Banks are not raising their prime lending rates. Yet, for Corporate India, the cost of money is set to go up marginally. Does that sound like a riddle?

India Inc's interest burden will increase as a fallout of the Reserve Bank of India's directive to banks to start charging interest on loans on a monthly rest basis starting this April, replacing the prevailing practice of charging interest on a quarterly basis.

Once the new system is in place, the yield for banks on advances will go up on a compounded basis. For borrowers, the cost will go northwards. Here is how this will happen.

If a company is paying an interest rate of 12 per cent annually on a Rs 1-billion loan on a quarterly basis, its actual interest cost - or yield from the bank's perspective - works out to a little over 12.5 per cent. But if the interest is paid every month, the cost will go up further to around 12.7 per cent on a compounded basis.

"The cost will go up by between 15 and 35 basis points, depending on the present cost of borrowing and the rating of the corporate. This is not a small sum," said a treasurer of a company.

Banks have not been able to put in place a new accounting structure to charge interest on a monthly basis. Borrowers are resisting the move because they are not willing to pay that extra bit when rates are actually heading southwards.

A string of banks, led by the State Bank of India, have approached the RBI to issue new accounting norms.

"We may see the guidelines in the forthcoming credit policy. Unless the central bank spells out the norms, we will go slow on this and no bank can start charging interest on a monthly basis from April," said a public sector banker.

There could be a bit of fine-tuning of interest rates to accommodate the changes in accounting norms. "We may have to charge rates on the net present value of the advances to ensure corporates are not required to pay more," the banker pointed out.

Banks have been directed to apply interest on a monthly rest basis in the case of new term loans and loans of long or fixed tenor at the time of review or renewal of loan accounts.

The application of interest on a monthly rest basis will be restricted to cash, credit and overdraft accounts. At the time of switching from quarterly to monthly rests, banks will also have to obtain consent letters or supplemental agreements from the borrowers for the purpose of documentation.

The RBI has directed banks to start the new practice from this month in the run-up to the globally accepted 90-day (one quarter) norm for the recognition of bad loans from the year ending March 31, 2004. At present, banks classify non-performing assets if the interest has not been paid for two quarters (180 days).

Bankers are not excited about the move because they feel the one-quarter norm for recognition of bad loans is set to increase the quantum of their NPAs.

They fear that once the 90-day norm is introduced, their NPAs will swell because corporates are not in the best of health. Gross NPAs have been on the rise, standing at Rs 638.83 billion on March 31, 2001, up from the Rs 604.08 billion recorded in the preceding financial year.

However, the RBI has made an exception in the case of agricultural advances, where banks will continue to follow the existing practice of charging interest linked to crop seasons.

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