Corporates go for short-term loans

Corporates are going for short duration bank loans with low interest rates at regular intervals rather than taking long –term loans at higher interest rates. This will help them in bringing their borrowing costs down as the banks have surplus liquidity and offering low interest rates.

The banks have surplus liquidity therefore corporates are looking for short-term loans of 30 days to less than a year’s duration at interest rates between four per cent and eight per cent. However banks give long-term loans at 11 per cent plus interest rate.

On the other hand banks are not interested to cater corporates’ demand for short-term loans as the banks have ‘other easy avenue' to invest the surplus liquidity i.e. the Reserve Bank of India's reverse repo window from this they are getting a meager 3.5 per cent return.

However, in comparison to T-Bills, the banks earn more interest from short-term loans. Thus banks don’t find any difficulty in giving these short-term loans.

Bankers warn against short-term loans. They say if corporates to meet their long term funds requirement go for short-term loans, in it a lot of risk is involved as there are chances of sudden drying up of funds and interest rates turning adverse.

A banker pointed out, “This is not a healthy trend, because if for some reason the loan cannot be rolled over then the corporate could face serious repercussions. But the cost saving in terms of interest rates, which works out to as much as 1-3 per cent, is quite substantial for corporates.”

Mr S.C. Kalia, Executive Director, Union Bank of India, says, corporates are ready to take risk as they can get cheaper funds.

He added, “Corporates know that there is liquidity in the system. Hence, they are prepared to take the risk. Therefore, they prefer to take short-term loans and roll them over''.

Mr Parthasarathi Mukherjee, President-Credit, Axis Bank pointed out for a bank it is better to give short-term loans rather than not giving any credit at all.

For the current fiscal the credit offtake for the entire banking system was quite sluggish at 10-12 per cent.

“More loans that are disbursed nowadays are of less than one year duration. When interest rates start nudging upwards people will stop looking at this kind of funding,” Mr Mukherjee said.

Mr Manish Kothari, Business Head, Corporate Banking, Kotak Mahindra Bank, explained, “Right now, most corporates are borrowing short-term money for refinancing their older expensive debts.”

According to bankers, through short-term credit they are earning credit growth. At present around 20 per cent of loans that are being given are loans are of one year or less duration. But these will automatically change with increase in interest rates.