Corporate borrowers take advantage of bank loans as yields turn corner


Bombay : An increasing number of corporate borrowers are lining up for bank loans as a direct result of the sharp rise in debt market yields, which has made such borrowing relatively cheaper.

With the cost of borrowing rising in recent months, businesses are gradually returning to banks, bankers said. This is especially true for lower rated borrowers who have to pay more to borrow in the markets than their higher rated counterparts.

According to a report by the Bank of Baroda, one-year market borrowings for companies rated between AAA and A+ continue to be cheaper than the rates offered by banks. However, for A-rated companies, borrowing from banks became cheaper than the market from December, while for those rated A-, banks were generally more profitable than the market.

“For 1-year paper, companies rated A- can have recourse to bank financing, given the interest rate differential for loans. For a 10-year paper, AA, AA-, A+, A and A- companies can consider borrowing from banks. The bond market is hospitable to AAA and AA+ rated corporate paper,” said the report prepared by the bank’s economic research department on February 3. The report highlights that in a scenario of rising government securities yields (G-Sec), at the same time, the marginal cost of the funds-based lending rate (MCLR) – the corporate lending benchmark for banks – is mainly determined by the political action of the Reserve Bank of India and revolves more around the repo rate.

The yield on the benchmark G-Sec 10-year hardened by 36 basis points in the month to Feb. 4, after rising sharply on Feb. 1 following the higher-than-expected borrowing plan. government for fiscal year 23.

Meanwhile, banks’ business loan portfolios are beginning to swell after a lull, although some are seeing low utilization of working capital limits. Bank lending to businesses rose 7.6% year-on-year in December to 29.85 trillion in December.

Large corporate loans rose 1.3% during the month, while medium-sized companies jumped 86.5% during the month, according to RBI data.

Bankers said they see other lenders taking over or refinancing loans as interest rates remain fairly competitive. However, some banks are unwilling to sacrifice their margins to attract more borrowers.

At the same time, the strong push for government infrastructure investment spending in the FY23 Union budget is expected to kick-start the private investment spending cycle, improving the outlook for lending growth, the bankers said. “Corporate (lending book) has grown well. We sanctioned very well, but due to the pressure of interest rates, part of the outstanding amount was moved from one bank to another. In addition, there was a recovery in December insofar as 6,000-7,000 crore expected, including at Air India, which reduced the outstanding amount little,” SS Mallikarjuna Rao, chief executive of the Punjab National Bank, told analysts on January 28.

According to Swarup Dasgupta, Executive Director of Bank of India, the public lender has a sanctioned loan pipeline of around 15,000 crore, most of which has yet to be used.

“The situation would improve in the coming quarters. There are few borrowers who take out bank loans, but nowadays everyone is very sensitive to interest rates. So there is a lack of real asset creation, and whatever happens (loan growth) changes hands between banks and is dictated by the interest rate scenario,” Dasgupta said.

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