The public sector banks have started charging pre-payment penalties, while the corporates have begun refinancing their loans. Top public sector bankers pointed out that some of the corporates are refinancing their loans via negotiating for lower rates from competing banks to cut interest costs. This has resulted into asset flight and their loan books in the second quarter have also been impacted.
Bankers told the refinancing of bank loans is done by placing non-convertible debentures and bonds with insurance companies and mutual funds at low rates. Also some of the foreign banks are also choosing top corporate debt for refinancing existing bank debts. In this financial year till now around Rs 75,000 crore has been raised through bond issues.
Out of this, only one third of the issues were of banks. The rest of the issuers are all of corporates mostly at coupons ranging from 7.5 per cent to 10.25 per cent. The top public and private corporates that had floated short term debt – of 18 month tenures – had raised funds at the low rates. While for the longer tenures the rates had remained at spreads of about 150 basis points over comparable sovereign yields for “Triple A” rated borrowers. But at these spreads also the rates were quite low than bank lending rates, however some public sector banks have been lending at discounts to the prime lending rates (BPLR) of about 11.25 per cent of as much as 100 basis points. For instance, cement major ACC’s Rs 300-crore five-year bond offering was priced at 8.45 per cent.
Bankers added the refinancing has further compounded to high liquidity within the banking system. The high liquidity was obvious from the way out to the reverse repurchase window that is currently upwards of Rs 1 lakh crore a day. Bankers told due to some “big ticket” pre-payments their earnings were getting impacted. On the other hand banks were already struggling with very low incremental credit deposit rates of barely 19 per cent.
The PSU banks do not prefer refinancing because of low ratios and the consequent drop in earnings. It has been in 2004 the PSU banks had held out the threat of pre-payment penalties.
Bankers say this time the pre-payment penalties are proposed to cut their costs. This means the penalties can be as high as two per cent of the outstanding principal. The proposed penalties will be almost equivalent to those levied by foreign and domestic private banks.
Although some PSU banks are offering concessions, includes lending rate resets, when the effective cost of working funds drop. In the last quarter banks weighted average cost was about 6.5 per cent. After a change in a net interest margin of 3 per cent, the officials say the lending rates can be around 9.5 per cent. Bankers added, in the third quarter, it is expected that the weighted average costs is likely to dip further by another 50 basis points. They said, “If there are no exits, this drop in costs will also be passed to good quality borrowers”.