Corporate borrowers may be hit by a double whammy in terms of higher borrowing costs and tighter availability of funds after the Reserve Bank of India (RBI) took a slew of steps to arrest the fall in the rupee.
The immediate reaction to steps taken by RBI to suck out rupee liquidity was seen in the bond markets where yields soared to a 14-month high, making borrowing from the bond market expensive for corporates. Adding to the trouble for borrowers, banks, to protect their margins, are mulling a hike in their short term lending rates.
?The prudence is to increase the spreads on corporate loans as we need to protect our NIMs,? MV Tanksale, CMD, Central Bank of India, said. Adding, he will not raise his base rate right now.
In a circular on Tuesday which revised measures announced just last week, the RBI has capped banks’ borrowings from its daily repo window at 0.5% of the deposit base of each individual bank. The earlier cap of R75,000 crore on the repo borrowings for the whole banking system now stands withdrawn. The central bank further tightened the liquidity by announcing the sale of cash management bills of 28-day and 56-day tenure totalling R6,000 crore. RBI also hiked the daily maintenance of the cash reserve ratio (CRR) to 99% of the 4% CRR requirement from 70% earlier. As a result, all banks will have to maintain 99% of the CRR applicable to them from the first day of a reporting fortnight starting July 27.
Since smaller banks asset and liability books are tightly matched they use the LAF window more frequently than larger banks, their cost of funds will be impacted immediately. These banks are in a hurry to transfer this cost to corporate clients and may also look at raising deposit rates till the time RBI?s measures are kept and liquidity is tight.
?Spreads of individual accounts on the corporate side can go up, though this will not be enough to completely protect our NIMs,? BA Prabhakar, CMD, Andhra Bank said.
?The corporates do not avail the long term full loan sanctioned at once, so the interest rate here will be left at current rates. The companies also take 3 months working capital loans where the interest is around the base rate or 25 basis points above the base rate. This should go up by 25-50 bps,? he added.
However some of the banks would wait till the RBI?s policy announcement on Tuesday before tinkering with their rates.
?Depends on how each individual bank views the current situation. If banks take a short term view, then they wouldn’t want to disturb their base rates, since changing base rates may have more structural implications. But if there is a long term view by a bank, you may see some base rate movement. As such, banks would like to wait till the monetary policy announcement next week to decide what they want to do with the rates,? Sunil Pant, chief general manager, State Bank of India.
Bankers also said that they have to be aware that the higher interest cost could mean that corporate credit would further slow down. Credit to industry increased by just 15.5% in May 2013 as compared with the increase of 19.4% in May 2012, according to the latest data from RBI.
