As yields turn a corner, corp borrowers tap bank loans

Bankers said with the cost of borrowing rising in the last few months, corporates are slowly turning to banks. This is especially true for lower-rated borrowers, who tend to pay more to borrow from the markets than their better-rated counterparts.

According to a report by Bank of Baroda, one-year market lending for corporates rated between AAA and A+ is cheaper than the rates offered by banks. However, for A-rated corporates, borrowing from banks has become cheaper than the market since December, while for A-rated ones, banks have generally been more cost-effective than the market.

“For 1 year paper, A-rated corporates may have to resort to bank finance considering the difference in borrowing interest rate. For 10 year papers, AA, AA-, A+, A and A- corporates can consider borrowing through banks. The report, prepared by the bank’s Economics Research Department on February 3, said the bond market is favorable for AAA, and paper of AA+ rated companies. The report noted that in the scenario of rising yields of government securities (G-secs), the same is reflected in corporate bond yields. Also, the marginal cost of funds-based lending rate (MCLR)—the corporate credit benchmark for banks—is primarily driven by and revolves around the policy action of the Reserve Bank of India. repo rate.

Returns on the 10-year G-Sec have hardened by 36 basis points in the month to February 4, following a sharp rise on February 1 following the government’s plan to borrow more than expected for FY13.

Meanwhile, corporate credit books of banks have started to swell after a period of sluggishness, though some are seeing under-utilisation of working capital limits. Bank credit to corporates up 7.6% in December from a year ago 29.85 trillion in December.

RBI data shows that credit to large corporates grew by 1.3% during the month, while those to medium corporates grew by 86.5%.

Bankers said they see other lenders take out or refinance loans as interest rates remain fairly competitive. However, some banks are not willing to sacrifice their margins to attract more borrowers.

Meanwhile, the big infrastructure boost by the government in the Union Budget for FY13 is expected to kick-start the private capex cycle, improving prospects for credit growth, bankers said. “The corporate (loan book) is well developed. We have given very good approval, but due to interest rate pressure, some of the dues have been transferred from one bank to another. Also, there has been a recovery during December to the extent of Punjab National Bank chief executive officer SS Mallikarjuna Rao told analysts on January 28 that including Air India is expected to cost Rs 6,000-7,000 crore, reducing dues.

According to Bank of India Executive Director Swarup Dasgupta, the state-owned lender has a sanctioned loan pipeline of approx. 15,000 crore, most of which is yet to be utilized.

“The situation will improve in the coming quarters. There are very few borrowers from the bank, but nowadays everyone is very sensitive to interest. So the actual creation of assets is missing, and whatever is happening (credit growth) is changing hands between banks and is driven by the interest rate scenario,” Dasgupta said.