Banks reluctant to Corporate Lending

As we all in this financial crisis central bank RBI is trying all its cards (REPO/REVERSE REPO/SLR/CRR) for easing the liquidity problem after the international credit crunch happened. To help that inflation is also coming down due to recession in almost all developed world & developing countries.

But still Banks are reluctant to lend to even good rated corporates due many reasons like default risk, safer & better returns through REVERSE REPO & GOVERNMENT BONDS.

According recent RBI data, banks parked Rs 2.8 lakh crore in reverse repo. This is more than10% of the total non food credit made available by the banking sector to industry in 2008. In addition, the stock of money held as government paper has also ballooned by 400% between October and November to Rs 93,000 crore. As the inflation rate declines, the attraction of this avenue will increase further.

Due to this for the week ended November 30, it shows that commercial paper— short-term corporate borrowings with a maturity of less than one year—has been raised at rates in the 9.0-15.5% band. The lower end is less than the best rates offered by Indian banks to industry, which is close to 10% (the prime lendingrateis12.75-13.5%).Naturally, long-term debt paper floated by corporate India is available at even lower rates.

This unusual situation can be attributed to banks’ reluctance to lend to companies, post September. Matters have been made worse as RBI too has been unable to provoke them into lowering rates sufficiently. At present, the reverse repo rate is 5%, just below the rates available for government paper.This implies that banks can safely park their deposits with RBI or buy treasury paper to safe guard income.

Bottom Line:

Thats why RBI needs to lower the REPO & REVERSE REPO rate at least 50-100 basis points by looking at other conditions.

Source:
Financial express