Photo: Hindustan Times
Photo: Hindustan Times

HDFC Bank’s rate cut may signal beginning of an industry shift

As loan growth slows, other banks may have to lower rates sooner rather than later to remain competitive

HDFC Bank Ltd’s 35 basis point base rate cut to 9.35% earlier this week could be the start of an attempt by lenders to remain competitive with corporate bond yields, which have fallen sharply in the past year, according to bankers and analysts.

One basis point is one-hundredth of a percentage point.

Other banks also hit by a slowdown in loan growth may have to respond to the private lender’s action and lower rates sooner rather than later to remain competitive with regard to large, higher-rated firms, analysts said.

But Kishor Kharat, managing director and chief executive officer at IDBI Bank Ltd, among the many banks that have not cut rates, said he is not worried that HDFC Bank’s cut will take away clients.

“This is not a rate-sensitive market yet. Companies are still sitting on excess liquidity because capacity expansion is not happening. Also the fact that commercial paper rates are much cheaper than bank loan rates means that demand for loans has not yet picked up. I don’t think because HDFC Bank has a lower rate, clients, especially corporate ones, will rush to borrow from them so I am not worried," Kharat said.

HDFC Bank’s cut is the steepest in recent memory and ensures that the bank’s minimum lending rate is much lower than those of competitors State Bank of India (SBI) and ICICI Bank Ltd, both of whom have not yet changed their minimum lending rate from 9.70%.

Ashish Parthasarthy, head of treasury at HDFC Bank, maintains that the quantum of the base rate cut was linked to the formula the bank uses to determine its lending rate and had nothing to do with competition.

“Yes, we may be successful in gaining some market share but it will only be marginal," he said, adding that he also expects the bank’s net interest margin (NIM) to remain stable despite the bank’s cut in lending rate. NIM, or the difference between the yield a bank earns from loans and that which it pays on deposits, is a key gauge of profitability.

Some bankers are of the view that HDFC Bank’s move to slash rates so sharply is an attempt by the lender to wrest market share when loan growth is slow.

“This is an attempt to wrest market share. But we also think that the market is a big place and we can deal with this," the chairman of a large public sector bank which directly competes with HDFC Bank said on condition of anonymity.

Analysts point to the surge in short-term borrowings through commercial papers and corporate bonds in the last couple of years because of their lower yields.

Commercial paper yields have fallen 105 basis points to 8.40% from 9.45% a year earlier. The yield on the three-year corporate bond has fallen 98 basis points to 8.23% from 9.21% a year ago.

In contrast, HDFC Bank’s base rate has fallen just 65 basis points in the past one year. No wonder companies raised a record 4.32 trillion through private placement of corporate bonds in the year ended March 2015, up 60% from the 2.71 trillion raised in the year ended March 2014.

Purvesh Shelatkar, head of research at BoB Capital Markets Ltd, said HDFC Bank’s move will most likely trigger a reaction from rivals and eventually pull down bank lending rates.

“I think other banks are waiting for the end of this month to first gauge what impact HDFC Bank’s move has had on loan demand and also because both Reserve Bank of India’s rate action and US Federal Reserve’s interest rate decision are pending," Shelatkar said.

He does not expect a huge shift in demand towards HDFC Bank in the interim because corporate loan appetite is still weak as many companies are reeling under weak demand.

“But I am sure in the next two years, bank lending rates will come down by 2-3%," Shelatkar said.

Suruchi Jain, an equity research analyst at Morningstar Investment Adviser (I) Pvt. Ltd, said it’s about time bank loan rates came down. “Competitors like SBI will surely be evaluating lower rates, but delaying the decision by a few weeks will not lead to a large shift in the market. Yes, issuances of corporate debt have increased but it is still mostly available for the highest-rated companies and there is a whole market out there for small and mid-sized companies looking for credit," Jain said.

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