The credit target set by the Reserve Bank of India for the financial year 2009-10 has led banks to start lending at low interest rates. Such has been the pressure on banks that the Indian Oil Corporation (IOC) was granted a loan of Rs. 1000 crore from banks last week at a rate that is much cheaper than what is granted normally to such borrowers. These rates are even lower than the rates at which banks pay their depositors.
IOC was able to fetch the loan at 4.75% for a 90 day tenor. The banks are normally paying 5.5%for three months in their commercial deposit path. This shows that banks are lending at rates lower than the cost of funds.
The dealers of money market have said that IOC has received the loan at tremendously low rates when all other AAA rated companies are also lent at 5.50-6%. The rate that has been charged to IOC is only marginally higher than the cost of funds of the bank.
RBI has projected that the overall credit growth in India this year would be 16%. The banks are on lending spree so as to meet the target as the year is approaching towards and end. The government banks have however conveyed to the Finance Ministry that they would be able to attain 18-20% credit target. The performance of banks in the lending aspect has not been very promising this year which led to RBI revising its projections three times from 20% to 18% and finally to 16%.
In order to meet the target most banks have to lend another Rs.130k crore to borrowers.
Banks are so desperate to meet the target that they are ready to grant loans for one year at very low rates in a hope that they would be able to recover their cost of funds in the upcoming fiscal.
However, with the year coming to an end, there is also a gush of depositors coming in for loans so as to meet their annual targets. In fact the second half of February has witnessed a huge increase in credit flow of the banks.
The banks interest rates are expected to remain stable in the next quarter. SBI chairman O.P. Bhatt even said that he does not expect deposit as well as lending rates to increase in the upcoming months.