Prime lending rates

When one looks at the corporate debt market, yields on instruments of five- year maturity range between 12-13.5 per cent in the case of Triple A rated corporates. Now, when one takes a look at prime lending rates (PLR) in the banking sector, they range between 12-13 per cent for the same corporates, no matter what the tenure of the loan--right from one month to 10 years.

This is apart, of course, from the cumbersome documentation procedures they entail, as against a quick private placement of well-rated corporate paper. This creates major distortions in interest rates and lowers the potential of credit offtake from banks.

With the credit policy round the corner, the problem could perhaps be solved by the RBI giving an impetus in this matter to banks and setting down guidelines to quote multiple PLRs linked to maturity. Incidentally, two years ago when ICICI quotedits medium term PLR, there was a surge of interest and banks started quoting multiple PLRs, too. However, that has not got off to much of a start since many bankers argue that it is too complex--more complex than a floating rate PLR system linked to a single pre-determined benchmark--that is being mooted.

However, one cannot be a substitute for the other. This is because a floating rate PLR that is uniformly applicable to all maturities cannot reflect a rational difference between interest rates on loans of various tenures, although it would definitely reflect prevailing interest rates effectively for a consolidated tenure. Why banks have been even more averse to move over to a full-fledged system is that they still have to take a real plunge into long term infrastructure financing. Even so, there is no doubt that a single maturity PLR cannot differentiate between loans of various maturities.

To make multiple PLRs even less complex, a separate structure could be adopted. Banks could be asked to definetheir PLR (which will be the only benchmark in this case) as a rate which is offered to Triple A rated corporates for a maturity of, say, 30 days.

Any interest rate for longer periods could be worked out on the basis of a formula: 30 days PLR + X basis points for increase in maturity + Y basis points for higher credit risk (the latter is factored in even now). Banks could decide on weightages. Once this happens, they are likely to bring down the basic PLR to even 9-9.5 per cent in order to accommodate the many other slabs within a rational structure. Effectively, the PLR comes down without the RBI resorting to steps that augment liquidity.

Nalco

Apart from the successful restructuring of its huge equity base to more rational levels, the twelve months ended March 1999 have had precious little to offer for Nalco shareholders. The Nalco stock is trading at Rs 15.80, which is precariously close to its four-year low of Rs 14.75.

Nalco has been affected by depressed global aluminium prices with prices onthe LME falling to a 4-year low of $1,258 in September 1998, which is almost 20 per cent lower than the levels of $1,450-$1,600 per tonne last year. Adding salt to Nalco's woes was the production failure of as many as 480 smelter pots since January 1998, which hampered production.

This background helps put the 56.11 per cent drop in Nalco's bottomline for the year ended March 1999 into proper perspective. The drop in profitability would have been even more severe had it not been for the change in the company's accounting policy from operating on a cash basis to accrual basis, which have effected an increase in income by Rs 24.72 crore. But even then increased depreciation charges and a higher effective tax rate of 29.34 per cent, have all eroded Nalco's profitability.

Nalco's performance on the operational front has failed to inspire. Sales for the twelve months has dipped 18.77 per cent to Rs 1,505.67 crore. Even this was thanks largely to sales of nearly 30,000 tonnes in March, otherwise sales for thenine-month period were actually down 27 per cent.

Nalco has been unable to reduce costs as a results margins dipped from almost 44.53 per cent last year to 34.25 per cent. A recent announcement of the company achieving a zero debt status, after repayment of a 20 billion Japanese yen loan, has been taken by the markets with a pinch of salt, as it was merely a temporary phenomenon.

A byproduct of the restructuring exercise, is nearly Rs 322 crore worth of long term loans with a tenure of five years bearing a coupon rate of 14.5 per cent. Thus the reduction in equity, has been counter-balanced by a sharp jump once again in the company's interest burden.

Furthermore, Nalco might also have to borrow in the future to meet its expansion and diversification plans, which have an estimated capital outlay of about Rs 3,900 crore. Thus while Nalco has currently parked surplus funds earmarked for meeting its future debt obligations in short-term deposits, the company will have little option but take on additionaldebt in the future.

More importantly for Nalco, its losses appears to have been Hindalco's gain, which has endured the soft aluminium prices and poor offtakes with a strong product mix. A revival for Nalco would to a large extent be based on buoyant LME prices, a scenario which does look impractical at least in the interim. And with domestic demand yet to pick up, the troubles only seem to have started. Thus all that shareholders at Nalco can do in the interim is take solace from the equity restructuring which will definitely help improve earnings and valuations, once there is a revival.

Emcee (With contributions from Jayshree Bose and Percy Dubash)