Corporates to keep off banks for loans

The share of bank credit in the overall credit requirement of corporates is expected to decline further from July 1 when the base rate regime takes effect. Corporates are seen preferring the commercial paper (CP) route for short-term borrowings rather than go to the banks.

“CP is a cheaper route than borrowing from banks. If the borrowings are for a time frame below one year, then it serves as a feasible option,” said Uday Phadke, president (finance), Mahindra & Mahindra.

Currently, corporates get cheaper credit at sub-prime lending rate (sub-PLR) from banks. But from July 1, sub-PLR will no longer exist.

“The introduction of base rate will result in more corporates switching to CP as the base rate won’t give a scope for sub-PLR lending,” said H K Vesuna, chief general manager (corporate credit), Central Bank of India.

The share of bank credit in overall credit/ fund requirements of corporates has already declined from 90% in 2001 to 55% in 2010.

The share of CP, on the other hand, has risen from a mere 2% in 2009 to 6% in 2010, Macquarie Equities Research said in a note.

“We believe large corporates that form 20-30% of overall lending of most banks are unlikely to accept high rates and are likely to resort to short-term borrowings through the commercial paper market,” Suresh Ganapathy and Mudit Painuly of Macquarie wrote in a note.

Analysts expect the base rate for most banks to be in the range of 7.5-8.5%. Which means loans below this rate will not be available. In the past. corporates have borrowed from banks below 5% for their working capital requirements.

In the last one month, three-month CP rates have risen by 170 basis points. During the same period, six-month CP rates have risen 125 basis points and one-year CP rates by 70 basis points amid a liquidity crunch due to 3G auction payment and now advance tax outflow. Despite this, rates are below the expected base rate. A three-month CP is currently at 6.7%, six-month at 6.88% and one-year at 7.4%.