Corporates ask banks to extend fixed-rate loans for three years

Inflation has crossed 8%. Oil prices hiked, prices are expected to remain high there are no signs of reduction and weakening rupee is making imports more expensive. All these factors are creating pressure on interest rates.

Corporates fear the Reserve Bank of India (RBI) might hike interest rates in order to tighten the liquidity in order to control inflation; therefore banks may also raise lending rates. Hence corporates are asking banks to extend fixed-rate loans. Currently, most of the large and mid-sized corporates are taking loans with a one-year reset clause, which means that the interest rates are fixed for one year and consequently come up for review. Therefore corporates are demanding for fixed-rate loans for three years. On the other hand banks have completely stopped offering fixed rate loans for more than one year.

A senior banker told, “Since we take deposits at market-related rates, it is not feasible for us to lend at fixed rates for longer tenure. We will suffer from interest-rate risk.” The best-rated corporates are being charged in the range of 9-9.30% for the one-year fixed-rate loan. On retail loans differential between interest rate for fixed rates and floating rates is high whereas corporates are charged almost the same rate for fixed rates or floating rates. In the current situation where the liquidity is slowly drying from the system and profit on the benchmark 10-year government bonds crossing the psychological barrier of 8%.

The best-rated corporates are charged in the range of 9-9.30% for the one-year fixed-rate loan. Further, unlike retail loans where the interest rate differential between fixed rates and floating rates is high, corporates are charged almost the same rate for fixed rates or floating rates. With the liquidity is slowly drying from the system and yield on the benchmark 10-year government bonds crossing the psychological blockade of 8%, many corporates are rushing to take fixed rate loans fearing that they might have to pay more if rates are hiked.

Currently banks’ prime lending rate (PLR) is secured in the range of 13-15%. However, highly-rated corporates have got most loans at rates way below the PLR. According to bank sources the credit pick-up has been better since the beginning of this fiscal year, as there has been large demand from oil, manufacturing and infrastructure sectors. Sources say that State Bank of India alone has sanctioned close to Rs 20,000 crore since April.

“We are lending aggressively to ensure the momentum continue and to ward off the perceived slowdown in the economy,” said a banker.

“Similarly, the corporates, too, are in a hurry to tie up funds to protect themselves from interest-rate risk,” they added.

Money supply growth is crossing 22.5%, hence it is widely expected that the central bank will come up with monetary measures. Bankers are also expecting that RBI might increase the cash reserve ratio which can push up bond yields higher. In the secondary market for government securities, profits on the 10-year government bonds have increased from below 8% in early May to 8.3%.