INEREST RATE JITTERS

Banks have began bargaining tough with corporates. They are now lending at higher rates to even top-rated corporates than what they did about six months ago. The change in stance has come largely due to concerns about their profitability. Most banks are now charging interest rates close to 11-11.30% from even best-rated corporates compared with 10-10-30% charged six months ago. This decision is driven by fears that their margins could come under pressure on account of a steep hike in cash reserve ratio (CRR) — the minimum deposits that banks have to maintain with the Reserve Bank of India (RBI). A CRR hike pinches bankers the most, as the central bank does not pay any interest on the funds that banks park with it. CRR is now pegged at 8.75%, which means that banks do not earn anything on an equivalent amount of funds parked with the central bank. Between January and July, RBI has raised CRR by 125 basis points (bps). This, in turn, hurts their margins — the difference between the interest rates that banks pay on deposits and the rates that they charge their borrowers. Banks have been charging their prime customers sub-PLR rates — interest rates much below their benchmark prime lending rates (PLR). Most public sector banks have pegged their PLR in the range of 12.75-13.25% while foreign and private banks have fixed it at 15-17%. “Spreads between the sub-PLR and PLR have narrowed very marginally in the past couple of months. However, even now, there is reluctance among big corporates to pay higher rates on loan,” said KC Chakrabarty, chairman and managing director of Punjab National Bank. Earlier, the spread between PLR and sub-PLR was as high as 250-300 bps. This has narrowed to 150-200 bps now.
“Spreads will narrow further if RBI hikes key interest rates in the coming days. Banks will have to raise sub-PLR rates to protect their margins,” said G Narayanan, executive director of Indian Overseas Bank. Most bankers have indicated that they may fail to meet the targets on margin this fiscal year if RBI continues to use the CRR as a tool to curtail rising inflation. Recently, banks have pleaded to the central bank not to raise CRR to manage inflation. However, a number of analyst have projected a hike repo rate and CRR. “Banks have began the exercise of raising sub-PLR rates, but it requires a lot of negotiation with corporates. Due to long-term relationship, corporates do not easily accept higher rates. But slowly, they are coming around to accept that fact that high interest rates are here to stay,” said RS Reddy, executive director of Union Bank of India.