PremiumWith the cost of borrowing rising in the past few months, corporates are gradually returning to banks, bankers said. This is especially true for lower-rated borrowers who have to pay more to borrow from the markets than their better-rated counterparts.
| Listen to this article |
MUMBAI : A growing number of corporate borrowers are queuing up for bank loans in a direct fallout of the sharp rise in debt market yields, which has made such borrowings comparatively cheaper.
With the cost of borrowing rising in the past few months, corporates are gradually returning to banks, bankers said. This is especially true for lower-rated borrowers who have to pay more to borrow from the markets than their better-rated counterparts.
According to a Bank of Baroda report, one-year market borrowings for corporates rated between AAA and A+ continue to be cheaper than rates offered by banks. However, for corporates rated A, borrowing from banks has turned cheaper than the market from December, while for those rated A-, banks have typically been more cost-effective than the market.
“For 1-year paper, corporates with rating A- may have to resort to bank finance, considering the interest rate differential of borrowing. For a 10-year paper, AA, AA-, A+, A and A- corporates may consider borrowing through banks. The bond market is hospitable for AAA, and AA+ rated paper of companies," the report prepared by the bank’s economics research department said on 3 February. The report pointed out that in a scenario of rising yields of government securities (G-Sec), the same gets reflected in corporate bond yields. At the same time, the marginal cost of funds-based lending rate (MCLR)—the corporate lending benchmark for banks—is mainly driven by the Reserve Bank of India’s policy action and revolves more around the repo rate.
The yield on the benchmark 10-year G-Sec has hardened 36 basis points in the month till 4 February, after a sharp rise on 1 February following the government’s higher-than-expected borrowing plan for FY23.
Meanwhile, corporate loan books of banks are starting to swell after a period of lull, although some are seeing low utilization of working capital limits. Bank loans to corporates grew 7.6% from a year earlier in December to ₹29.85 trillion in December.
Loans to large corporates grew 1.3% during the month while surging 86.5% for medium corporates during the month, RBI data showed.
Bankers said they see other lenders take over or refinance loans as interest rates remain quite competitive. However, some banks are unwilling to sacrifice their margins to attract more borrowers.
Meanwhile, the large infrastructure capex push by the government in the FY23 Union budget is expected to kick-start the private capex cycle, improving loan growth prospects, bankers said. “Corporate (loan book) has grown well. We have sanctioned very well, but because of the pressure of interest rate, some of the outstanding has been shifted from one bank to the other. Also, there has been a recovery during December to the extent of ₹6,000-7,000 crore expected, including in Air India, which has little reduced the outstanding," S.S. Mallikarjuna Rao, chief executive of Punjab National Bank, told analysts on 28 January.
According to Swarup Dasgupta, executive director, Bank of India, the state-owned lender has a sanctioned loan pipeline of about ₹15,000 crore, the bulk of which is yet to be utilized.
“The position would improve in the coming quarters. There are few borrowers taking bank loans, but nowadays, everybody is very interest-sensitive. So real creation of assets is missing, and whatever (loan growth) is happening is changing hands between banks and is driven by the interest rate scenario," Dasgupta said.
Never miss a story! Stay connected and informed with Mint. Download our App Now!!