Offer to accept LoCs at high rate of 24%
Biju Mathew
MUMBAI, January 22: Some banks are taking advantage of the severe liquidity crunch in the system by offering to accept letters of credit (LC) at a high rate of 20-24 per cent. Sources say banks like the Central Bank of India and Bank of Madura are offering to take LCs at 20-24 per cent.This is the highest rate for LCs during the last two years. This follows the complete stoppage of accepting LCs by banks since Monday owing to soaring call rates and the severe and sudden liquidity crunch in the system. Usually LCs are taken by banks at prime-lending rates (PLR) as the funds are not blocked for long and are backed by the issuing bank's guarantee. Since no bank was accepting LCs in the last few days, some like the Federal Bank, alongwith Central Bank and Bank of Madura, entered the market o Thursday offering to take LCs at higher rates. These banks stand to make huge profits as the LC is locked in for a minimum 60-day period, while the present high call rates are expected to settle down in a few
weeks. LCs are used by companies for their supplier credit and does not fall under the cash-credit limit prescribed for each bank. Corporates are forced to draw on high rates as all their other short-term avenues of finance like issue of commercial paper with banks have come to an end after the turbulence in the call market.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
|
