The proposed move of Indian commercial banks to extend credit to blue-chip corporates at the sub-prime lending rate (sub-PLR) will not stem the appetite of corporates for raising resources via the private placement route on account of liquidity and interest rate differential considerations.
Banks, all along, have been big investors in privately-placed corporate debt issuances like non-convertible debentures as, hitherto, this was the only means for them to extend credit at sub-PLR.
Also, investments by banks in the papers, especially of sound companies, are perceived as liquid, compared to extending loans which are relatively considered illiquid.
"There will, no doubt, be pressure on banks to extend credit to their best borrowers at sub-PLR, but then they cannot wish away exposure limits to individual corporates. To skirt this, these banks will continue to subscribe to the debt issued by the companies," said an analyst with a leading company that undertakes private placement of debt.
The prime lending rates of majority of the public sector banks, which account for nearly 70 per cent advances in the country, is in the range of 11.5 to 12.5 per cent.
Even if these banks, for the sake of retaining their best corporate clients, lend at 100 basis points below PLR, they will be no match for the NCDs issued by corporates, as typically, coupon rate quoted by them is about 80 basis points above the yield on government paper of similar maturity.
"The corporates will continue to find it cheaper to tap the NCD route for raising resources," said the analyst.
On the balance, the Rs 50,000 crore per annum private debt placement market will remain unaffected and continue to thrive despite the banks' plans to come out with sub-PLR lending, the analyst said. He pointed out that many corporates were eagerly awaiting a bank rate cut before they tap the private placement route for raising resources.
