Banks move forward on corporate lending
By Neelima Shankar
Mar 17, 2009
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With debt funding coming into focus, banks seem to be willing to lend to corporates facing funding problems for their ongoing projects. The lenders are extending more corporate loans at floating rates.

The banks are insisting on the "minimum interest rate clause" while disbursing the loan and the corporates are not willing to expect this clause as interest rates are expected to decline. A merchant banker said, "Banks are offering loans at a floating rate, say 13.5 percent, but they are inserting a minimum 13.5 percent interest rate clause for a certain period."

These merchants say that while the interest rates will fall in the coming times, banks will be able cover their cost of funds yet they are setting a floor price for corporate loans.

The merchants feel that banks are insisting on the minimum rate clause because they want to protect their profits margins in case of rate fall in the near future. "Banks are keen to put such a clause to protect their bottom line in case the interest rate falls further, but this is hurting borrowers," the merchant banker said.

However a bank official said the period for which the fixed minimum rate clause will be valid is going to be between six months and one year. In fact some banks are willing to offer lower rates to corporate that are willing to take the loan under a fixed rate for a certain period. A senior official at a private bank said, "Even if the benchmark prime lending rate moves down, pushing the loan rates lower, the bank is assured of a fixed return for at least some time with a floor rate."

Meanwhile a merchant banker said, "Today, we find a situation when banks (especially PSU banks) have sufficient liquidity and choices available with them to consider for funding, out of numerous proposals lined up."

Thus in such a scenario, merchant bankers are getting speedy corporate loans and banks have also received many loan proposals.

Banks claim that even big guns that never demanded funds through this window are approaching them at the moment.


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