MUMBAI, July 23: The Industrial Credit & Investment Corporation of India (ICICI) has introduced a new floating rate in the Indian market styled short-term prime rate (STPR). The new rate is expected to undercut banks' prime lending rates by a huge margin.The STPR will be applicable to loans with one-year maturity and is pegged at 12.5 per cent - one percentage point (100 basis points) lower than the prime lending rate of the State Bank of India and a majority of public sector banks. The STPR is 50 basis points lower than ICICI's medium term prime rate (MTPR) - meant for loans between 18 and 30 months - and a full two percentage points (200 basis points) less than the prime lending rates of all financial institutions.Said an ICICI official: "We have test-marketed the product with 20 top-notch corporates in the last few weeks. With the introduction of the STPR, corporates will now have a choice between fixed rate and floating rate loans.'' The instrument will formally be launched on Thursday.This is effectively a floating rate instrument since corporates will have the freedom to roll over one-year loans on maturity with the interest rates being reset every year. In the course of time, the institution will attempt to link the one-year interest rate or STPR to 364-day treasury bills. The ICICI experiment will be watched with keen interest since earlier attempts to create a floating rate instrument have not worked. In 1993-94, both IDBI and ICICI introduced floating rate bonds and loans linked to T-bills. But there were few takers for them.This time, though, given the greater market acceptance of rapid interest rate changes, the response could be different. The introduction of STPR is likely to trigger an exodus of blue-chip corporate clients from public sector banks. ``What ICICI is indulging in is nothing but undercutting. It may have serious repercussions in the entire financial sector,'' said PSU banks chief.``There is no question of undercutting. The Reserve Bank has allowed us to access short-term one-year resources and this has made it possible for us to introduce the short-term interest rate. There is no compromise on the spread. The cost of borrowing one-year funds is now pegged at 10.25-10.75 per cent, depending on the quantum raised,'' ICICI officials said.IDBI, the largest term lending institution in the country, does not plan to react to the ICICI plan by slashing its PLR. "Liquidity is only one aspect. There are various other parameters that have to be looked at," IDBI chairman S H Khan said. The new instrument, according to the ICICI, is the institution's response to the challenge thrown by the Reserve Bank of India and the finance ministry in the form of the bank rate cut and relaxations in external commercial borrowing norms."With the introduction of new ECB norms and so much liquidity in the system (following the CRR cuts), corporates want optimum borrowing at optimum cost. There is fierce competition and we cannot survive on plain vanilla loans. The only way to meet the challenge is to introduce structured products," ICICI officials said.ICICI plans to disburse Rs 4,000 crore in the current fiscal through its short-term and medium term loans. Under the medium-term umbrella, it has already sanctioned Rs 1,450 crore worth of loans and disbursed Rs 930 crore. The rest of the amount - Rs 3,070 crore - will be distributed between short-term and medium-term loans. About 70 per cent of ICICI's medium-term loans went towards asset creation while the remaining 30 per cent was disbursed for working capital. "The major part of the short-term loans will be used for asset creation. The corporates will not substitute their working capital loans with this," an official said.
