Are banks less relevant in the funding ecosystem?

Going by data for 2014-15, yes.

According to data compiled by Mint, loans from banks accounted for only a third of the debt funds raised in 2014-15.

That includes funds raised from banks, market borrowings and external commercial borrowings.

The share of bank credit in overall debt raised has fallen steadily over the years but it fell sharply last year with companies moving towards cheaper and quicker sources of financing at a time when interest rates on bank loans remained high and many banks went slow on approvals because they were worried about the rising pile of bad loans on their books.

Companies have exhibited such behaviour in the past too, but these have been short-term.

This shift could be more permanent, given increased liquidity in the domestic markets and stronger demand in the international market for Indian paper.

Incremental credit from banks in 2014-15 was 5.2 trillion, 30% of the 17.2 trillion raised cumulatively from banks, market borrowings and foreign loans and bonds. A year ago, the share of banks was at 47%, having slipped from above 50% in the 2010-12 period. The analysis is based on data from the Reserve Bank of India (RBI) and financial data provider Prime Database.

“For companies, borrowing from the market may prove to be cheaper by 100-200 basis points as compared with the interest rate they would have to pay on loans, which is why they may choose to diversify. Another reason is that bank credit usually takes between one to three months before disbursement, while market borrowings can be closed within a week," said Ajay Manglunia, head, fixed income, Edelweiss Financial Services Ltd, explaining the shift away from banks.

The difference between market borrowing rates and bank borrowing rates was particularly pronounced last financial year as bond yields fell in anticipation of interest rate cuts by RBI. The lower yields reflected in the cost of borrowing in the commercial paper market. The interest rate on AAA rated 1-year commercial paper averaged 8.91% last financial year, according to data from Bloomberg.

On the flip side, banks kept their base lending rates steady through most of the last financial year arguing that their cost of funds had not reduced. A slight reduction in bank lending rates was announced in April after RBI governor Raghuram Rajan rubbished those arguments. Even today, the base lending rate of banks remains in the 9.7-10% range.

The rate difference pushed firms towards the markets, pushing up commercial paper borrowings by 40% to 5.8 trillion. “This trend is positive for the companies because they now have access to a diversified market, which augurs well for companies," said Prabal Banerjee, president, finance and strategy, at the Bajaj Group.

With foreign investors keen to subscribe to Indian debt, companies tapped into a rich lode and took out foreign loans and issued bonds.

“Indian companies have seen a good demand for their paper abroad because investors are more confident about the stability of the rupee vis-a-vis other currencies. This has introduced Indian companies to cheaper modes of funding even after taking into account the hedging cost for foreign currencies," said Purvesh Shelatkar, head of research at BoB Capital Markets Ltd, an arm of Bank of Baroda.

Large companies such as Reliance Industries Ltd and Bharti Airtel Ltd have borrowed aggressively in the international market for years. Last year this trend extended to relatively lower-rated companies such as JSW Steel Ltd and Indiabulls Real Estate Ltd.

This shift added to the troubles of domestic banks, which have hardly seen any pickup in demand for long-term credit due to a slowdown in investments in the country.

In the fortnight ended 29 May, outstanding bank loans stood at 66.33 trillion, a 9.8% growth compared with the same period a year ago. Through much of the last financial year, credit growth was close to 10% and fell to a decade’s low during the course of the year.

This drop in credit growth has resulted in banks losing out on net interest income (NII), or the difference between the interest paid on deposits and that earned on loans. For 36 listed banks, NII in the January-March quarter stood at 64,378 crore, a growth of 9.23% from the same quarter a year ago.

For state-owned banks however, NII growth during the fourth quarter was around 5.5%, data collated by Capitaline show.

Bankers claim that banks still remain the preferred option for a large number of borrowers and are hopeful that credit demand will return once demand for long-term funding revives.

“It may not be correct to say that there is a clear trend away from bank credit because we have seen that whenever commercial paper (CP) rates are higher for example, bank credit picks up. Yes, there are multiple sources of funding available for companies, but not all the funding options are open to everyone. Some routes like NCDs or ECBs are only available for top rated companies," said Sidharth Rath, head of treasury at Axis Bank Ltd.

But if this trend were to continue, banks might be forced to lend to lower-rated companies to manage their credit growth, and that involves more risks, Rath added.

Shetalkar of BoB Capital Markets says that banks may also need to consider compromising lending margins to become more competitive in terms of interest rates offered. M.S. Raghavan, chairman and managing director, IDBI Bank Ltd, agrees with that.

“The situation at this time is very dynamic. There is a lot of liquidity in the markets which is allowing companies to borrow more from there rather than coming to banks. But if this continues, banks will be forced to look at other strategies such as reducing base rates, cutting the spread we charge over the base rate, and repackaging the product to offer better value among others," said Raghavan.

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