The liquidity crunch following the IL&FS crisis has pushed corporate borrowers away from the bond markets, back to banks
Mumbai: The tide seems to have turned in favour of commercial banks: the liquidity crunch following the IL&FS crisis has pushed corporate borrowers away from the bond markets, back to banks.
Data released by the Reserve Bank of India (RBI) on 24 October shows non-food credit growth at over a four-year high of 14.5% year-on-year (y-o-y) for the fortnight ended 12 October. In absolute terms, non-food credit grew from ₹ 78.15 trillion in the fortnight ended 13 October 2017 to ₹ 89.47 trillion in the 12 October 2018 fortnight.
Banks have been seeing double-digit growth in this segment since December 2017 and it has been steadily recovering since April 2017 when it touched an all-time low of 2%.
Bankers are upbeat about the growth in credit and said corporate borrowers are returning as bond markets turn risk averse.
“The gap between bank lending rates and the borrowing rates from the bond market has considerably narrowed now. Moreover, in some cases, bank loans are turning out to be cheaper than bonds," said P.K. Gupta, managing director, State Bank of India (SBI).
Gupta said that as rate transmission in the bond market is quicker than in bank lending rates, the former has gone up following interest rate hikes, while the latter has seen a smaller change. For instance, SBI’s one-year marginal cost of funds-based lending rate (MCLR) in October is at 8.5% and an AA-rated corporate borrower can get loans from SBI at a rate of between 8.6-8.9%, indicating a spread of 10-40 basis points (bps).
One basis point is one-hundredth of a percentage point.
Rajat Monga, senior group president, Yes Bank, said bank loan growth is increasing because issuers are not actively looking at the bond market. “That is an opportunity," said Monga.
Data from the Securities and Exchange Board of India (Sebi) showed that outstanding corporate bonds were at ₹ 28.38 trillion as of September 2018, up 9.7% from the same period last year.
The current credit apprehension in the bond markets has been beneficial to banks as borrowers have started preferring bank loans over bonds, according to Ajay Manglunia, head (fixed income advisory), Edelweiss Financial Services.
“Banks have cashed in on the opportunity presented by the falling risk appetite of the bond market after the IL&FS crisis. Investors are going slow on investing in financial companies and that has led to higher spreads for other bond issuers as well at this moment," said Manglunia. He said that a AA-rated borrower can raise funds from the bond market at 9.5-10% now, up from 8.5% a year ago.
Bloomberg data showed that the yield on the 10-year benchmark bond has moved in the range of 7.581-8.181% in the last six months and stood at 7.876% on Friday.
To counter the liquidity crunch, RBI recently incentivized bank lending to non-banking financial companies (NBFCs) by easing liquidity norms and increasing the ceiling for lending to a single NBFC. Both relaxations are available up to 31 December 2018.
The first signs of the liquidity crisis emerged when IL&FS defaulted on its payment obligations, followed by downgrades by credit agencies.
On 17 September, rating agency Icra downgraded IL&FS’s credit rating to default after it failed to meet repayment obligations of ₹ 12,000 crore in short-term and long-term borrowings. It had earlier defaulted on a ₹ 1,000-crore loan from the Small Industries Development Bank of India (SIDBI) on 13 September.
Then the news of DSP Mutual Fund selling DHFL’s one-year ₹ 300-crore paper at 11% and the subsequent fear of a contagion effect spooked the market. DSP Investment Managers Pvt Ltd later clarified it had no credit issue with DHFL and was just trying to reduce its portfolio maturity. The DHFL management also said that it had not defaulted on any bonds or repayment, nor had there been any instance of delay on repayment of any liability. The management of DHFL said it did not have any exposure to IL&FS.