Changing colours of bank lending to the corporate sector
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The collapse in non-food credit growth to a mere 4% is proof enough that Indian banks are giving a cold shoulder to companies. But have banks really stopped lending to companies altogether?
A look at the growth of banks’ investments into other instruments such as equity and corporate bonds throws up a different picture. In 2016-17, banks invested close to Rs3.55 trillion in corporate bonds, which is 25% higher than the previous year. This is the highest yearly growth in two years and entirely driven by investments into bonds issued by private sector non-financial companies. Banks also extended finance to companies through investing in short-term commercial papers. In fiscal year 2017 (FY17), these investments totalled Rs33,000 crore.
With more than 10% of their loan book ravaged by bad assets and these bad assets arising out of large borrowers, banks are now cherry-picking bond issuances of better-rated companies to ensure timely repayments.
State Bank of India, the country’s largest lender, has increased its investments in corporate bonds issued by its clients by 45% in FY17. Adjusted for its corporate bond and commercial paper investments, the lender’s loan growth for FY17 would double to 14.07% from 7.92% excluding these two items.
But why is this shift from banks happening, especially when bonds have to be marked to market price, exposing banks to losses?
Firstly, companies that have the requisite ratings to approach the bond market prefer to do so since bonds are still cheaper than loans. A company rated AAA can get five-year money at least 100 basis points cheaper than loans. In many instances, companies are nudging banks to give them money through the bond route.
The corporate bond market has historically entertained only the best rated. Any borrower with a rating below AA has found the place unfriendly and those rated even lower cannot even dream to borrow through bonds unless they cough up exorbitant yields. Since the credit quality of companies is better than the current crop that sits on bank loan books, lenders are warming up to bond investments.
But the most important factor is the liquidity that is sloshing around in the banking system. Banks have to deploy every rupee that they mop up from deposits into either lending or investments to earn.
Given that loan growth has collapsed and the outlook for it is anything but sanguine, banks would rather put money into bonds than keep it on their books. Moreover, through bonds, they are essentially putting money into good credit.
It is clear that price is driving the show and given that loan rates are stickier than bond yields, banks would wisely choose to load up bond investments to earn off their idle cash.
The problem, of course, is that smaller firms that cannot access the bond market gain nothing from this shift.