* Cuts in bank lending rates may draw more towards loans
By Krishna Merchant
SINGAPORE, Jan 9 (IFR) - Cuts in bank lending rates may spur
some Indian companies to switch their fundraising back to loans,
reversing a recent trend towards to the bond market, investment
Following the surge in bank deposits triggered by
demonetisation late last year, State Bank of India, the
country's largest government-owned lender in asset terms, cut
its so-called marginal cost of funds-based lending rates (MCLR)
Others like Bank of Baroda, Punjab National Bank, Union Bank
of India, Kotak Mahindra Bank and Dena Bank have followed with
cuts of 45bp-90bp in their rates.
Indian lenders have received an estimated 14.9 trillion
rupees ($219.3 billion) in deposits after Prime Minister
Narendra Modi banned 500 and 1,000 rupee bank notes last
November to curb black money.
The lending rates were cut after Modi, in an address to the
nation on New Year's Eve, urged banks to take initiatives to
help the poor and the middle class.
"Sharp lending rate cuts will slow corporate bonds issues in
the near term, especially from A+ and AA- rated borrowers," said
Jayen Shah, head of debt capital markets at IDFC Bank.
The spreads between short-tenored, lower-rated corporate
paper and bank lending rates have compressed.
SBI's MCLR is just 10bp above the yield on AA rated
five-year corporate bonds, compared with 100bp in November and
December, according to CLSA Research.
Even one-year A+ and AA- rated corporate bonds are yielding
7.4 percent and 8.15 percent, respectively, according to Thomson
Reuters data, below SBI's one-year MCLR of 8 percent.
The initial estimate is that spreads between bond yields and
MCLR have narrowed 45bp-50bp since the banks started cutting
lending rates, according to Shah.
As a result, lower-rated companies may find it cheaper to
continue accessing the loan market versus the bond market.
"We believe corporate borrowers stand to benefit the most as
they will look to refinance their loans at much lower yields
than before," said Kotak Institutional Equities in a research
note dated January 3.
"We understand that many of these borrowers are the ones
that looked to move to MCLR with shorter refinancing
time-frames. Given their excessively leveraged position, we
believe this segment will stand to benefit the most
immediately," reads the Kotak note.
Foreign brokerages feel the lending rate cuts will help
banks regain market share from bonds.
In a January 3 note, CLSA said the cut in loan rates "will
make banks competitive against bond markets and aid credit
Bond issuance has been growing in a range of 17 percent to
21 percent in the last three years, while credit growth has been
hovering at around 8 to 10 percent, according to CLSA research.
State banks now expect credit growth to pick up from an
During a press conference early last week, SBI chairman
Arundhati Bhattacharya said the rate cut would boost credit
growth 100bp-200bp in the current financial year to March 31.
NO SWITCH FOR TOP BORROWERS
However, some fixed-income analysts believe that high-rated
companies will be reluctant to switch to bank loans.
"Public-sector enterprises and AAA rated companies will
continue to approach the debt market", as they are able to raise
funds for longer tenors, such as 10-year at rates as low as 7.3
percent, which is still cheaper than the bank lending rates,
said Ajay Manglunia, head of fixed income at Edelweiss
Others also doubt that credit growth will pick up while it
remains difficult for Indian consumers to spend money.
"There is still uncertainty when the money will come back to
the system," said a rates strategist at a foreign bank. "Why
would small and medium enterprises take loans when their
businesses have been hurt?"
Currently, there are limits on individual withdrawals from
bank ATMs, and a lot of small businesses that transact in cash
have seen a slowdown following the notes ban.
India's 10-year government yield was hovering at 6.4 percent
last week, its lowest level in nearly a month, after the
government cut the size of bond sales planned for January and
The reduction was due to the huge inflows to its so-called
market stabilisation scheme (MSS), which sold securities late
last year to absorb excessive liquidity. The government will
sell bonds of 660 billion rupees, less than the 840 billion
rupees budgeted previously.
"It's a very dynamic environment and corporate bond yields
are continually readjusting and, until the gap between bond
yields and MCLR widens further, some issues may remain on hold,"
said IDFC's Shah.
(Reporting by Krishna Merchant; editing by Daniel Stanton and