A new phenomenon is now being seen in India that is lending at rates that are far higher than what the government is allowing banks to lend.
The eidla loan is a loan where the borrower can make up to 50 per cent of the loan amount by selling shares in a company.
The share sale involves the borrower buying the shares and selling them to the company for cash.
It can take as long as a year to get the loan, and it’s possible to get a loan only in the case of a borrower who’s already got a good credit rating and no outstanding debts.
But there is a catch: the borrower cannot sell the shares until they reach the amount of the amount they borrowed.
The borrower can’t even buy the shares at a higher rate than they paid for them.
“It is a form of cash advance loans that can get you into trouble in the future,” says Arvind Sharma, a partner in the India business group at law firm Leigh Day.
“If you’re a large company, you can have a lot of cash flow coming into the company and the cash flow is a huge amount.
The problem is that the loans are getting less and less affordable. “
So it’s not like you’re going to get out of a bad situation.”
The problem is that the loans are getting less and less affordable.
A recent survey of more than 5,000 banks by credit rating agency Fitch found that out of the total 1,100 banks in India, only 40 per cent were making loans at below 10 per cent interest rates.
In January, the Reserve Bank of India (RBI) lowered the lending rate on the eidlar loan to 5.5 per cent from 6.5 percent.
The RBI, which is responsible for the country’s banking system, said it was reducing the rate to prevent a repeat of the recent spate of bad loans that have hit the banking sector in recent years.
Fitch has since issued a revised rating for the eirat loan.
The banks are now lowering the interest rates again, but this time the RBI is giving banks an incentive to do so by keeping the rate lower.
“There’s a perception that the banks are doing a lot better now.
They’re getting better at doing their due diligence, but they’re also getting more aggressive in the loan application process,” says Sharma.
The interest rates on eidls are now lower than the rates on conventional loans, which has left the borrowers in the lurch.
The banks have also been getting more aggressively courting big corporates, offering them a much larger loan than they were able to afford before.
Last week, a large corporates including the Reliance Group, Reliance Jio and Indian Oil and Gas Corporation (IOC) said they would be opening their own eidel loans, similar to the ones they already offer.
There is also talk of the banks giving new types of loans like PPP loans.
“I think this is going to happen because of the government’s emphasis on lending, which it’s a very good effort,” says Amit Kumar, managing director at RBS India.
“We have a strong presence in the banking system.
We’re trying to do more with the government in terms of helping borrowers to get into debt.
The government is keen to see that banks start to become a part of that.”
While some lenders are taking advantage of the new rules, the banks have been slow to change course.
According to a study by Credit Suisse, banks have spent $3.2 trillion on eirats so far.
They have invested $838 billion in the ei-loan market and have borrowed $7.8 trillion.
“There’s no real interest in changing this, because there’s a lot that banks can do with the money that they’ve invested in lending,” says Vinay Jain, managing partner at Credit Suise.
“And they can take a look at the loan applications that they have made, and say, ‘How do we do this better?’
It’s a case of how do we better serve people in the economy, and in the same time, how do they do that without impacting the lending and the business models?”
As banks continue to shift to a more business-friendly environment, they have also begun to look at how to monetise the eis.
In March, the National Payments Corporation of India announced that it would be introducing an ei levy to help banks monetise their eis, a move that has raised fears that the new eidloans could be a new form of money printing.
Sudha Kale, the head of the Payments and Clearing Division of the RBI, said that the government would not be making any changes to the eie system.