Large companies may have to pay more

Cost of funds may come down for small and medium enterprises and go up marginally for large companies once the new rules for pricing loans kick in from April 1.

The new rules will make pricing of loans more transparent.

The Reserve Bank of India on Wednesday asked banks to create a 'base rate,' which will replace the prime lending rate, the benchmark that banks use at present. The base rate will be the new floor price and each bank will compute it on a cost-plus basis.

Ravi Sud, chief financial officer, Hero Honda, said cost of funds for SMEs might come down while large companies, which often could borrow at less than the PLR, may not have much leverage. He believes his suppliers will be able to borrow at rates lower than the PLR.

"If a borrower knows that the base rate is 6-7 per cent and he's being charged 11-12 per cent, he has the right to know why the bank is asking for 11-12 per cent,'' said Sud. He fears that the base rate may not be substantially lower than the existing PLR as they will find it hard to justify why they were charging 5-6 per cent more.

Utpal Parekh, senior vice-president (finance), Panoramic Universal, says the base rate will ensure more clarity as the borrower will know what is the best rate he can get. But, he said, he did not believe that the cost of funds would come down for smaller companies as banks would still have to price in the credit risk.

Issac George, CFO, GVK Group said the base rate would reflect a bank's cost of funds and its efficiency. Banks such as State Bank of India and Punjab National Bank, which had large savings deposits, would have lower base rates.

"The lower the base rate, the more efficient is the bank. At present, the PLR does not reflect the banks' cost of funds, which has an element of margin or cushion built into it," said George.

Large companies, which have been borrowing at sub-PLR, won't be able to do so as the base rate will be the new floor price.

But, they will retain their bargaining power. "Companies with high credit ratings will be able to command lower spreads over the base rate," said George.

So, a company with AAA-rating could be able to borrow at the base rate plus 50 basis points, while another company with a slightly lower credit rating might have to pay a spread of 100 basis points.

''It's becoming transparent. The borrower will know the lender's cost of funds, and what's the spread he's willing to pay for a loan,'' said a CFO.

There are, however, a few grey areas which RBI will have to clarify. For instance, CFOs are not sure how the base rate will move -- if it will change in three months, six months, or in a year. It is not clear it it will be a floating rate.

Similarly, companies are not sure if the base rate will apply to old loans or only to new loans.

Subba Rao, CFO, GMR Infrastructure, said the base rate would bring transparency but not the kind of market-determined borrowing that companies had been looking forward to.

LIBOR is the London Interbank Bank Offered Rate, the benchmark rate for international markets. Companies have to pay a spread over LIBOR depending on their credit profile.