BANKS TRIM DISCOUNTS ON CORPORATE LOANS

Deposit rates after the hike in May month are in the 6.75-7.5% range at the long end (3-5 year tenures) and at the short end (15 days-1 year tenure), from 4% to 6% for both private and public sector banks. Besides, most of the banks that have tapped the bond markets for raising tier two capital have found price expectations high. Accordingly, most of the entrants have priced their issues at close to 9%. This has resulted in pushing up the weighted average cost of working funds. The discounts on corporate loans have shrunk to 100-150 basis points below the BPL rates for AAA companies. A major component of the term advances comes with covenants with 3 year reset clauses or are on floating rate loans. Many of these reset covenants are linked to Government security yields or to 364-day Treasury bill yields. The 364-day TE-bill yield at the last auctions was close to 7.1 %. A year ago, when bankers were asset chasing, the 364-day T-billing rate was 5.6 %. For AAA corporate, the spreads were about 150 basis points over this benchmark. For long-duration project lending, the benchmarks used were the 10-year yield to maturity. This yield is currently close to 8 %.