Rising corporate bond yields may send India Inc to banks for loans

With bond yields rising, it seems companies may find it more profitable to go back to banks for loans, rather than coming to the bond market.

This will partially break the emerging trend of ‘disintermediation’, or companies diversifying away from bank credit to other sources of funds, which started about two years back as banks refused to lower their lending rates, while the fixed income market incorporated every cut done by the central bank.

The Financial Stability Report published by the Reserve Bank of India (RBI) in December, and subsequently a staff paper of the central bank, argued that the bond market could have come of age and companies above A+ rating need not come to banks for loans.

For example, in August 2017, AA- rated corporate houses could raise three-year money from the bond market at 7.87 per cent, whereas State Bank of India’s (SBI’s) marginal cost of funds-based lending rate (MCLR) was at 8.24 per cent. The similar maturity government bond at that time was at 6.48 per cent.
 

If we consider the situation now, AA- rated companies can raise money from the market at 8.35 per cent, whereas, the SBI lending rate is now at 8.1 per cent. In fact, even AA rated companies will find both the markets equally viable, as rates in both would be 8.1 per cent.

Armed with the Insolvency and Bankruptcy Code, banks may have found their risk appetite back and would be eager to lend now.

“Earlier, companies used to go to the bond market as it was quicker, cheaper, and because banks had very less risk appetite.

Now, the situation has completely reversed, and it is no longer easier to raise bonds from the market because of the recent corporate defaults,” said Prabal Banerjee, group finance director at Bajaj Group.

“On the contrary, banks are now eager to give loans. They are sanctioning quickly and making the deals as per the convenience of the customers,” said Banerjee.

In the past, the central bank had done everything it could to force banks to pass on the rates, brought down from 8 per cent in January 2015 to 6 per cent now. But banks dilly-dallied. The bond market, though, had no problem in embracing the new rates and better rated companies started moving away from banks and credit growth slumped to 5 per cent in March 2017. The RBI had to even change how lending rate methodology is calculated, and link it to more market-oriented marginal cost base. The central bank is also working on another version of it to force quicker transmission.

While banks did not really anticipate disintermediation to happen to this extent, despite former RBI governor Raghuram Rajan’s repeated warnings, banks were fearful of the trend when it happened and saw it as a challenge.

To revive the corporate loan business at a time when rates are hardening, banks are swimming in the opposite direction. SBI surprised everyone by paring its base rate by 30 basis points at the start of the year. While the base rate is an old system, much of the older corporate loans are on base rate, or on an even older version of lending rate, and not based on MCLR. According to a banking source, SBI’s decision was partly prompted by its old corporate clients threatening to move to the bond market to refinance their loans.

However, SBI’s loan rate cut has also made it impossible for other banks to increase their lending rates for some time. As such, say analysts, even if yields rise, bank interest rates would remain low for many months to come. And this is already showing in the credit growth numbers. Bank credit grew at about 11 per cent for the first time in a year at the end of December 22, according to the RBI data.

Experts say with yields on corporate bonds rising, the credit growth numbers would continue to show healthy growth year-on-year.