India Inc to benefit in the short run

Last Updated: Sun, Oct 07, 2012 04:25 hrs

As part of its reforms process, the government on Thursday announced many amendments to the Companies Bill, which post Parliament's approval will become law. Among key measures suggested is alignment of inter-corporate loan rates with those offered by government securities of similar tenure. For example: If Company A borrows Rs 100 crore from Company B for 120 days, it will have to pay the prevailing interest rate on a 120-day government security (G-Sec).

Same will be the case for loans of other tenures. Currently, the rates vary between one and 18 per cent. The amendments are aimed at doing away with the opaque system and put in a transparent mechanism. Experts believe, this move will benefit companies in the shorter run.

Madan Sabnavis, chief economist, CARE says, "The decision to link inter-corporate rates with government securities would mean that typically the rates will come down, which will help companies that resort to such borrowing as the government yields are lower than nine per cent. With interest rates having already peaked, companies will benefit from this rule.

However, one has to also keep a watch on RBI policy actions because any reduction of rates by the RBI in terms of repo rate will also lower the bank rate, which after a point of time may be lower than the G-Secs' rate. For example: If the repo rate is brought down to six or 6.5 per cent from eight per cent, then the bank rate will move down and move towards the reverse repo rate, while GSec yields may not come down to the same extent. Therefore, in the short run this move is beneficial for the borrowing corporates though in the medium term the RBI policy needs to be observed."

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