Corporate lending to rebound as loan-bond rate gap narrows, RBI eases norms

Analysts expect banks' corporate credit to pick up as the bond-loan rate gap narrows and RBI reforms, including acquisition financing and eased exposure norms, begin to bite

Bank lending to companies is expected to go up in the coming quarters because the difference in interest rates between corporate bonds and bank loans has narrowed.

 

In addition, recent policy reforms by the Reserve Bank of India (RBI), including allowing domestic banks to do acquisition financing, are expected to give further support to corporate lending, analysts said.

 

Corporate lending by banks had lagged overall credit growth following deleveraging by companies after the pandemic waned because they increasingly shifted to debt sources such as capital markets and foreign borrowing.

 

Greater access to equity markets, the absence of large private-sector capital expenditure, and healthy internal accruals also supported this shift.

 

 

However, analysts said corporate lending tended to pick up during periods when the gap between borrowing rates narrowed.

 

Trend analysis over the past few years of  “AA bond” yields and external benchmark-linked lending rates (EBLRs) shows a pickup in bank-sourced corporate credit growth whenever the differential between the two borrowing rates narrows.

 

This is expected because a smaller borrowing-cost advantage in bonds encourages companies to shift to bank loans, which offer greater flexibility and a quicker turnaround.

 

A report by Ambit Institutional Equities said: “The interest rate gap between bond yields and benchmark rates (EBLR/MCLR) is a key factor driving this shift. Interestingly, we observe that as the rate gap narrows, bank corporate lending surges, which may materialise in the coming quarters.”

 

Growth in corporate credit remained subdued in the first half of the financial year because the bond markets transmitted rate cuts faster than the markets for bank loans did, prompting companies to tap the former.

 

However, with the gap between bank-lending rates and bond-market rates narrowing, and recent RBI policy reforms such as risk-weighting reductions and the easing of norms on large exposures could support a pickup in growth.

 

“Large banks … remain key beneficiaries of a growth pickup while the focus may remain on lower-rated accounts (AA/A) to manage margins,” analysts at Ambit wrote.

 

Ajit Velonie, senior director, CRISIL Ratings, said: “Bond markets price in changes in the repo rate quickly while the transmission of the MCLR (marginal cost of lending rate) happens with a lag. This is why the differential between the one-year MCLR and bond rates widened between February and July this year, when the first set of rate cuts took place. Since July, however, there has been a sequential reduction in the MCLR till December, while bond-market rates started hardening after July. With this, we expect some reversal in bond-market substitution, thereby aiding growth in banks’ corporate portfolios.”

 

While there has been a pickup in lending, it has been gradual, another analyst said, noting that large companies are borrowing as opportunities arise and shifting between bank loans and corporate bonds, depending on relative rates, as corporate bond yields are currently elevated.

 

“(The) RBI’s easing measures are expected to help, but their impact takes time to filter through banks’ credit decisions. Banks are generally more comfortable lending to higher-rated (AAA) corporates, and there is a clear migration towards safer, higher-rated exposures. Incremental corporate lending has not meaningfully accelerated yet, despite banks’ stated willingness to lend,” the analysts added.