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Rate war about to break in the banking system; Ample cash leads to loans of short tenure getting cheaper for large corporates

Thursday, July 26, 2007

A rate war is about to breakout in the banking system. Banks are flush with cash and bankers fear that corporates will now begin to play one bank against another and force rates lower. The ample cash in the banking system has led to loans of a short tenure getting cheaper for large corporates. Yields on one-year commercial paper and certificate of deposits- have fallen to 7.5% from 9.5% just two weeks ago.

And so India Inc. has started to demand lower rates for loans which do not exceed the one year bracket. Sheshagiri Rao Dir-Finance, JSW says, "I am definitely seeing lower rates being offered than a few days back." As corporates shop for cheaper loans, bankers are getting worried that the easy money available in the system will lead to banks undercutting each other. Most banks say they have fixed a floor price of between 8.5-9.5% for short term loans and it will not profitable for them to lend below this rate.

However PSU Bankers warn that private banks, especially those which have raised money from public issues, may offer cheaper rates because loan demand fell sharply in the apr-june quarter. Bankers add that lending rates have already come down by as much as 200 basis points for very short term loans. But term loans of 3-5 years are still being offered at 11-12%. Once the RBI governor gives a direction to banks on where rates are headed only then will banks drop rates for these loans.

Posted by FR at 5:41 AM  


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