Home / Industry / Banking /  Smaller banks lose biz to larger peers

MUMBAI : Large private banks are dangling aggressively priced refinance loans before lower-rated corporate borrowers to poach them from smaller banks, two people aware of the matter said, given their abundant liquidity and limited avenues to deploy funds.

Banks have always tried to undercut each other to win corporate borrowers, but this was so far targeted only at the corporate creamy later, which anyway negotiates significantly low pricing.

The higher the credit rating of a corporate borrower, the lower the probability of it defaulting on repayment obligations. However, the two people cited above said a new trend is emerging where similar pricing is being offered even to riskier corporates rated BB+ just to show credit growth. “Some large private sector banks are giving loans to these entities at 7-7.5%, almost 200 basis points (bps) lower than what is the prevailing market rate. Smaller banks are not able to match it and have lost several clients to such pricing," one of the two people cited above said on condition of anonymity.

He added that large private lenders make their move when it is time for corporate borrowers to refinance the existing loan with a smaller bank. However, there may be a catch—these larger banks insert stringent clauses in the loan agreement, including penalties if they plan to switch to another lender or prematurely close their account.

“They also tell borrowers that for such low rates, they have to use other financial products from the same bank as they try to recoup the 200-bps upfront discount. While it may seem attractive for borrowers at present, once the liquidity situation changes, loans will get repriced and leave these borrowers vulnerable," the person cited above said.

The Reserve Bank of India has maintained that it will retain its accommodative monetary policy stance as long as necessary to sustain durable growth. In fact, surplus liquidity has increased in the last couple of months. On 6 August, RBI governor Shaktikanta Das said buoyed by the renewed vigour of capital inflows and RBI’s purchase of government securities in the secondary market, total absorption through reverse repos surged between June and August. While the central bank was mopping up a daily average of 5.7 trillion in June, it rose to 6.8 trillion in July and further to 8.5 trillion in August.

According to the second person, well-rated corporates are also benefiting from the abundance of liquidity. However, not many large corporates are willing to raise funds at the moment as private capex, though expected to see some momentum, is still languishing. The slow pace of credit growth is thus a combination of banks’ reluctance to lend and the lack of demand from borrowers.

Bankers believe that undercutting is also a function of the kind of lending opportunities available. As economic growth rebounds in FY22, they believe there will be renewed demand for loans. Non-food credit growth stood at 6.5% as of 16 July, with total outstanding loans at 107.9 trillion, showed data from RBI.

“Last year we had a de-growth of 7.3% in the economy and this year we are looking at a positive growth of 8-9%. So, to that extent, there should be much better opportunities in terms of credit this year. Also, you would see working capital limits getting better utilized, and the liquidity overhang which was there should diminish," said Sanjiv Chadha, chief executive, Bank of Baroda.

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