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Corporate borrowing costs tumble

New Delhi, Jan 25: India Inc's borrowing costs have come down drastically even though real interest rates have fallen by only a percentage point in the past two years.

A study conducted by the Federation of Indian Chamber of Commerce and Industry (Ficci), covering almost 295 companies in the manufacturing and trading industry, shows that interest expenditure per unit of net sales has declined from 4.9 per cent in the third quarter of the financial year 2000 to 4.2 per cent in 2001 and further down to 3.7 per cent in 2002. The two main reasons contributing to this decline are the falling interest rate regime and low borrowings by the corporate sector. However, the study points that there has only been a marginal increase in the quantum borrowed by these companies.

Trends in the banking sector show that bank rates have declined from 8 per cent in 1999-2000 to 6.5 per cent in 2002. Simultaneously, the prime lending rate (PLR) has dipped over this three-year period.

The study has looked into the real interest rates in order to ascertain whether the decline in the PLR had any effect on the actual borrowing of the companies. It points out that in 1999-2000, the PLR was at 12.25 per cent while the rate of inflation remained at 3.3 per cent and the real interest rate stood at 8.9 per cent.

The corporate have not rushed for more borrowing as the real interest rates have reduced by a percentage point over the last two years. The total borrowings have increased from Rs 31,349 crore in 2000 to Rs 32,796 crore in year 2002. During the same period, a fall in nominal interest rates lowered the interest expenditure of these companies.

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