Loan refinancing sees more takers

A number of high-rated corporate and mortgage borrowers are refinancing their loans, taking advantage of prevailing historic low lending rates, three senior bankers said.

Low asset creation by corporate customers and availability of refinance at cheaper rates before the interest rate cycle turns is a big draw for these borrowers, the bankers said. Home loan customers are also shifting from costlier loans in quest for better refinance deals.

For instance, mining giant Vedanta Ltd said on 31 January it has tied up with Union Bank of India to take over existing loans of ₹8,000 crore from lenders led by State Bank of India (SBI). Vedanta said it had taken a syndicated loan of ₹10,000 crore in 2020 from a group of lenders led by SBI at 10.5%.

One of the bankers cited above said the company secured the new loans at least 200 basis points (bps) cheaper than its earlier loan.

“We have lost out on a stable borrower because of the competition among banks in interest rates,” the banker said, requesting anonymity. He said there is a lot of demand for corporate borrowers rated AA and above, leading banks to significantly undercut their offerings.

The median marginal cost of funds-based lending rate (MCLR)—the benchmark for bank loans to corporates—stood at 7.25% in December 2021, down 5 bps from a year earlier, showed data from the Reserve Bank of India (RBI).

Large state-run banks such as Punjab National Bank, Bank of Baroda and Bank of India have seen borrowers with strong cash flows and balance sheets look for cheaper alternatives.

According to Sanjiv Chadha, chief executive, Bank of Baroda, whenever there are downswings in the interest rate cycle, it is in the interest of borrowers to look at getting loans repriced at current costs. While, at times, it might be possible within the bank, that may not be the case at all times owing to issues like regulatory challenges or the fact that the bank might want to hold its price line, Chadha said.

“In fact, in terms of our home loan growth, it was again tempered by this factor that while we were disbursing loans, there was a lot of refinancing because it was a very good quality book and thus came under a lot of pressure from refinancing,” he said.

That said, bankers are optimistic that since rates have bottomed out, most of the refinancing has already been made and such deals would ebb going forward.

Most large banks have unutilized working capital limits and term loans as private capex has yet to take shape. State Bank of India, the country’s top lender, has about ₹2.06 trillion for working capital and ₹1.99 trillion in unutilized term loans.

Similarly, Swarup Dasgupta, executive director, Bank of India, said the bank has a sanctioned loan pipeline of about ₹15,000 crore, the bulk of which is yet to be utilized.

“The position would improve in the coming quarters. There are few borrowers taking bank loans, but nowadays, everybody is very interest-sensitive. So real creation of assets is missing, and whatever (loan growth) is happening is changing hands between banks, and is driven by the interest rate scenario,” Dasgupta said.

That apart, S.S. Mallikarjuna Rao, chief executive, PNB, told analysts on 28 January that while the bank has sanctioned several corporate loans, some of the outstandings have shifted from one bank to the other because of the prevailing pressure on interest rates.