Lenders form cartel to keep overnight call rates high
Anirban Nag
MUMBAI, January 22: Traditional lenders like Industrial Credit & Investment Corporation of India (ICICI), Industrial Development Bank of India (IDBI), Unit Trust of India (UTI) and Punjab National Bank (PNB) are believed to have formed a cartel to keep overnight call rates high. Sources in the money market said these lenders are refusing to lend below 40 per cent to traditional borrowers like new private sector banks and foreign banks. The Reserve Bank of India, on its part, is watching the market closely but is yet to take any action against these lenders.This follows the Reserve Bank's decision to jack up domestic interest rates by tightening the liquidity in the system. The objective is to maintain a stable exchange rate. Among the other institutions, insurance companies like National Assurance have also jumped into the fray. Two term lending institutions--IDBI and IFCI--on Wednesday raised their lending rates by one percentage point each. ICICI is expected to announce its new lending rate on
Friday. According to sources, in a tight money situation where liquidity is at a premium, financial institutions are making hay. Moreover, with no reserve requirement to be fulfilled, institutions are standing to gain through lending in call. "We are making a good spread," an institutional source said. Highly placed institutional sources said these institutions are setting a benchmark in a lenders' market. According to them, the apex bank is not likely to take any action. "When it was a borrowers' market and we were forced to lend at five-six per cent, the Reserve Bank did nothing to jack up interest rates. Now, in all fairness let the market forces rule and the Reserve Bank should not tell us to lend at lower rates", the source said. "They are driving the market and unless they bring down their lending rates, it will be difficult for call rates to rule between 15-20 per cent," a dealer said. In the process, it is the new private sector and foreign banks which are getting hit and are booking losses.Even cooperative banks have turned lenders. On Thursday call rates dipped to 30-35 per cent for sometime as dealers said that these banks were lending. "But they are small players and as soon as they left, the traditional lenders jacked up the rates for the borrowers", a dealer in a private bank said. Overnight call rates continued to remain high and closed at 65-70 per cent on Thursday with stray deals being struck at 80 per cent. The high rates are having an impact on the forward rupee with near term rates ruling at 40 per cent. In the gilts market also, yields of securities have been rising across the board. The 364-day treasury bill maturing on January 30 was traded at 19.50 per cent today-up from 17 per cent on Tuesday. Other securities, which saw a crash in prices, were the 13.50 per cent gilt maturing in 1998 and 13.70 per cent gilt maturing in 1999. The prices of both these securities fell by more than Re 1.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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