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Low interest rates a myth for most, reality for some

BS Banking Bureau

Low interest rates might be a myth for most of the corporates. But for some, it's a reality.

Treasury-savvy banks are running mini-banks within the company to get the best rates while raising loans. The banks are not competing with fellow banks but ending up competing with corporate treasuries which have tremendous bargaining power.

It's a buyers' market and the cost of money is going down sharply for smart, best rated companies. In March, Shipping Corporation of India raised Rs 2.5-billion 5-year money from Bank of Baroda at 8.75 per cent.

Till recently, such a deal was unheard of. SCI leads the pack of corporates and public sector units which have been forcing banks to lend money at cheap rates as they are saddled with liquidity.

Earlier, these corporates were raising bonds (non-convertible debentures) at cheap rates as banks were not allowed to lend at rates below their prime lending rates.

The Reserve Bank of India allowed banks to lend at below their PLR last year but still that did not make the AAA-rated corporates happy as they wanted money even cheaper. And the banks lost no time in designing new products to make the corporates happy. For instance, the State Bank of India floated a commercial paper (CP)-linked instrument to offer working capital loans to corporates at low rates.

Pre-payment of high cost loans by raising low-cost fund is fast emerging as a phenomenon among corporates. The list of big corporates which have raised loans at cheap rates through bonds includes Hindustan Petroleum Corporation Ltd, Grasim Industries, Bharat Heavy Electricals Ltd, Neyvelli Lignite Corporation Ltd, Housing Development and Finance Corporation Ltd, Powergrid Corporation Ltd, Hindustan Aeronautics Ltd and Power Finance Corporation.

During financial year 2002, HPCL raised a 6-year loan at 8.50 per cent; Bhel and Grasim mopped up a 7-year loan at 8.85 per cent and HDFC issued a 5-year paper at 9.19 per cent. A 6-year loan raised by the Powergrid Corporation Ltd cost it only 9.20 per cent.

HAL was able to float a 7-year paper at 9.25 per cent, while PFC's 7-year paper carried a coupon of 9.30 per cent. BPCL was able to raise 7-year loan at 9.90 per cent and Tata Power mopped up a 9-year loan at 10.25 per cent. All these companies are AAA-rated.

In a fiercely competitive market, the companies are auctioning CPs to get the best rate and the banks are scrambling for credit offtake.

Of course, the drop in the cost of corporate loans could not match the drop in the yield of government securities. But that is another story.

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