Undisbursed loans may lead to rate war, even if RBI tightens

Contrary to popular perception on interest rate movement, expected to head north following a likely central bank action on monetary tightening, banks may actually end by cutting rates in the below-prime lending rate region for at least their corporate clients.

This is because of the huge pipeline of undisbursed loans the banks are sitting on (see table) and their scramble to bloat top line to reach closer to the yearly targets.

As a result, irrespective of what Reserve Bank of India (RBI) does on rates, banks will try to undercut each other to push loan growth. The latter has been at a historic low in the last quarter and resulted in a fall in net interest income for most state-run lenders.

According to bankers, companies already smell the arbitrage opportunity and have started “shopping”. In bankers’ parlance, “shopping” means seeking quotes from one bank and using it to bargain for a better deal from another.

And, banks may have to oblige to boost both top line and bottom line. With treasury performance expected to be in the red, banks are banking on core income for improving their performance. In the third quarter, big banks like State Bank of India, Bank of India and Union Bank of India reported mark-to-market (revaluing assets at current value) losses on their bond portfolio, as yields on sovereign bonds hardened.

Bank of India, for example, is sitting on Rs 30,000 crore of sanctioned loans, yet to be disbursed. With the lender having 28.5 per cent of gross investments in the available for sale (AFS) category, a rise in bond yields will result in mark-to-market loss on its bond portfolio. The bank is betting on the undisbursed loans in the current quarter, which will not only improve its net interest margin but also lower net and gross non-performing assets. Bank of India is expecting at least Rs 10,000 crore disbursements from the sanctioned portfolio.

For SBI, the difference between sanctions and disbursements, on last count, was Rs 50,000 crore.

For banks, sub-BPLR lending, despite RBI’s repeated warning, constituted around three-fourths of the total. While most banks did not disclose the data, SBI said that during the third quarter, 67 per cent of the incremental growth in lending quarter had been at sub-PLR rates, in which the share of home loans was 28 per cent.

In recent months, banks have been forced to lower rates in segments such as home and auto loans to attract more customers.

In addition, companies are also being wooed through short-term loans at lower rates to ensure banks earned more than the 4.19 per cent they got on liquid funds or the 3.25 per cent by parking money through the reverse repo window.