Bill-discounting, L/C Rates Crash As Corporates Shift To Sub-PLR Mode

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: Interest rates on letters of credit (L/C) and bill-discounting have been coming down over the last two years attracting more and more corporates and small industries to switch to this channel compared to regular loans.

Rates on these discounting tools of short-term nature (30 days to a maximum of 90 days) have come down by over 2 per cent over the last year-and-a-half.

Says Union Bank of India (UBI) general manager -credit monitoring R Venkatramani: "Rates on L/Cs has witnessed a fall of nearly 2 per cent over the last 12 to 18 months."

Others like Dena Bank general manager (treasury) RN Pradeep says: "The rates have come down by 3 per cent during the last 18 months period." Even in the six-month bracket, rates have seen a downward trend: of 1 per cent to 1.5 per cent.

All these developments have brought down the discounting charges to a range of 10-11 per cent, nearly two percentage points below prime lending rates (PLR) — either long- or short-term in the range of 11 per cent to 13 per cent — in many cases.

But what makes it attractive to the customer? Says Bank of India (BoI) general manager (credit) TR Madhavan: "If traders or suppliers have to take a regular loan, they might have to shell out 13-14 per cent of interest. But through L/Cs and bills, they can get funds at a rate of around 10 per cent. Even in the case of the seller, it makes a good bargain as the benefit of 3-4 per cent derived by the seller would be passed on to the buyer."

However, no rate-war had been witnessed nor is it likely to take place in the near future.

Says Mr Pradeep: "A rate war is not foreseen. The interest rate downtrend is mostly based on the prevailing market rates." In fact, every bank is on the lookout for good customers for this business, but to no avail, he adds.

L/Cs and bill-discounting tools are used by traders or suppliers and industries, on sale or purchase of goods and services.

These negotiable instruments are usually drawn on the buyer by the seller for the value of the goods being despatched.

The L/C or bill drawn would be payable on the maturity date of the instrument. These are of two kinds — drawn against payment and acceptance.