Banks preparing to hike discounts to their PLRs

Under pressure
Discounts may be raised by 50-100 bps in coming weeks if offtake did not improve.
Credit offtake growth was less than 10 per cent during the current financial year.
Till September, low credit offtake from domestic banks was attributed to ECBs.

In a bid to stimulate credit offtake in the peak seasons, banks are preparing to offer discounts to their respective benchmark prime lending rates (BPLR)।

Currently, only highly rated corporates are raising bank funds at discounts to the BPLR, that currently ranges 12.75 per cent to 13.5 per cent. The discounts, even for these corporates, are barely about 100 basis points. Yet despite the discounts, the average cost of borrowings was close to 11 per cent.
Bankers said that one of the major factors that prevented corporate credit offtake was the high rates. The only other sector drawing credit at low rates was the farm sector. Farm loans are dispensed at 7 per cent, as banks are entitled to a Government subsidy of another 2 per cent, taking the effective yield on the advances to 9 per cent. Bankers said that the discounts were likely to be raised by another 50 to 100 basis points in the coming weeks, if offtake did not improve

Cause for worry
Currently, credit offtake growth was less than 10 per cent during the current financial year, triggering worry bells among top bankers. On a year-on-year basis, growth was about 22 per cent, down from the 30 per cent growth during last financial year. Non-food credit growth from April this year to December 8 was Rs 1.69 lakh crore against Rs 2.04 lakh crore during the corresponding period of last year. Deposits grew by at least 23 per cent during the same period. But for the redemption of corporate demand deposits, deposit growth would have been over 25 per cent, the bankers said.
Till September, low credit offtake from the domestic banking sector was largely on account of external commercial borrowings (ECB). ECB inflows between April and September were $10.6 billion as against $5.7 during the corresponding period of the previous year. The preference was largely on account of the perceived low costs of ECBs and the appreciation of the rupee.
With the clampdown on ECBs since September this year, most banks had anticipated a reversal, in the form enhanced credit offtake। In fact, a clutch of corporates ranging from the Power Finance Corporation, the Rural Electrification Corporation and other infrastructure utilities were now planning to raise the funds from the domestic financial markets, through long-term borrowings. However, the bankers said the proposals were yet to materialise, since most of them anticipate rupee interest rates to slide in the coming weeks.

Credit ratings
Besides, most banks have already sought ratings for the small and medium sector corporates, especially those with a credit limit of Rs 5 crore and above or a turnover in excess of Rs 50 crore. As these corporates also obtain credit ratings the lending rates would also reduce or they would also be entitled for discounts to BPLR. SMEs, in fact, were in the process of being rated with the expectation that borrowing costs would drop drastically as Basel II kicks in next financial year.