Home / Industry / Banking /  Firms, retail borrowers wary amid soaring rates

MUMBAI/NEW DELHI : The weighted average lending rate on fresh loans has increased by 82 basis points (bps) this fiscal year, with private banks effecting a 68 bps increase and state-run banks raising it by 96 bps, Reserve Bank of India data showed.

However, according to the data, the weighted average lending rate on outstanding loans rose by just 41 bps since April.

Borrowing costs are rising as RBI raised the repo rate by 190 bps since May to combat inflation and protect the local currency amid a rate hike frenzy by global central banks.

Experts said companies are reviewing capex plans even though they are still seeing a limited impact of the rate hikes because of the deleveraging drive undertaken in recent years.

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“Pressure may build up in select sectors such as infrastructure. Thermal projects will see an increase in interest rates as they are passed through. Renewable projects could see pressure. There will also be pressure on assets under construction. In that case, viability will also be under pressure," said Subodh Rai, president and chief ratings officer.

Many companies are looking at different sources of borrowing to replace high-cost loans from banks. Over the past month, many top-rated firms have shifted to the bond market for borrowing needs due to lower interest rates. Around 40,000 crore was raised via the corporate bond market in September, the highest monthly increase in 2.5 years. For an AAA-rated firm, a 2-3-year bond was available at a 7.15-7.45% coupon rate, whereas a three-year bank lending rate was 7.3-7.5%.

“Bond markets were stable last month, which helped corporates to shift to the corporate bond market for borrowing. This trend continued till yields were hit due to the global sentiments around the Fed rate hike. But this trend is likely to shift after the RBI rate hike as G-sec yields have hardened by 25 bps to 7.5%," said Ajay Manglunia, managing director of JM Financial Ltd.

Many other companies are looking at overseas funding to diversify their borrowing.

“Interest costs will definitely go up. However, to some extent, declining commodity prices will offset it. With rising interest rates, metal prices are coming down. There will be a structural shift in borrowing, too. Overseas projects form a significant part of our revenues. For the last couple of years, we shifted from dollar-denominated borrowing to rupee-dominated because of the arbitrage. Now, we may again resort to other currency borrowings. The interest rates are going up there, too, but premiums have been coming down," said Vimal Kejriwal, managing director and chief executive of KEC International Ltd, an engineering and construction company.

Kejriwal added that there is also a feeling in the market that competition among engineering and construction companies may see some impact due to rising rates. “The companies with stressed balance sheets may feel the pressure."

Carmakers said that demand is yet to take a hit due to rising borrowing costs. Banks are offering special rates on retail auto loans due to the festive season, which has ensured that demand is still robust.

“There have been four repo rate hikes, amounting to a 190 basis points increase in the repo rate in the last few months, but not all of it is reflected in the actual lending rates by banks. This month, in fact, banks are offering lower interest rates compared to last month. We expect that the repo rate increase will reflect at the retail level with a lag. We will be able to assess the impact on demand only then. Directionally, it should impact EMIs and, therefore, retail sales adversely. But due to the festive season, banks have reduced rates," said Shashank Srivastava, executive director, Maruti Suzuki.

“Moreover, because of a large backlog in pending bookings, we may not see actual impact on sales for the next few months," he added.

Elsewhere in Mint

In Opinion, Ajit Ranade argues a high upswing in business or investment cycle is unlikely in the near term. Anjani Trivedi writes why venture capitalists looking to put their money to work should keep an eye on India. Pradeep S. Mehta tells why courts should appoint economists and finance experts. Long Story draws chip-making lessons for India from East Asia.

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