STARVED for quality assets, a host of banks is resorting to rate cuts in a bid to attract top-quality corporate customers. While Bank of Baroda chairman and managing director SS Mundra confirms his bank is looking to reduce interest rates to corporates by 25-50 basis points, State Bank of India, which has been weaning away customers from other banks by offering them lower rates, says it could do better.
“If we want an account or if there’s a customer we’re coveting, we’re open to lending at 50-75 bps lower than the prevailing rate,” a senior SBI official told FE.
Typically, companies rated AAA are able to access loans at base rate plus 150-200 basis points whereas companies with weaker ratings would need to pay much more. However, burnt by the huge quantum of distressed assets that have piled up — much of it in the small and medium sector — banks now want to clean up their balance sheets by lending to top-rung corporates. That way, they would not need to set aside large amounts of capital for provisioning as they have been forced to do for many mid-sized accounts that have turned toxic.
Which is probably why, Sudhir Kumar Jain, chairman and managing director of Syndicate Bank is willing to offer AAA or AA-rated companies as much as 75 basis points less than the current rate. “With the risk of project implementation no longer there in many cases, companies are asking for a rate cut,” Jain explains.
Some banks are also trimming rates for their existing customers, fearful they may move to other banks. “We can’t afford to lose a good customer at a time when there are few takers for corporate loans, “says M Narendra, chairman and managing director, Indian Overseas Bank (IOB) who’s prepared to offer a 50 basis points cut to retain customers.
As SL Bansal, chairman and managing director of Oriental Bank of Commerce, points out, “banks don’t want to let go of good accounts like Tata, Hindalco and Reliance”. OBC’s corporate loan book – essentially loans to large companies – grew in single digits by just 7% in the year to December.
In October last year, SBI, the country’s largest lender had told FE in October that it was willing to offer at least 50 basis points less than the competition to take on good borrowers. The bank acquired customers such as Hindalco, Nuclear Power Corporation (NPCIL) and Gujarat Urja Vikas Nigam by offering them interest rates which were at least 50 basis points lower than what they were paying. In the case of Hindalco, the company was able to negotiate money from SBI at 10.2%, 300 basis points lower than it had been borrowing at. SBI chairman Arundhati Bhattacharya had confirmed the bank had refinanced about R8,000 crore in the April-June 2013 period. SBI’s base rate is 10% while most other public sector banks have pegged their base rates at a slightly higher level of10.25%; the bank has a relatively big base of cheaper current and savings accounts (CASA) – 44% of its total deposits – which helps lower its cost of funds.
Reserve Bank of India (RBI) data shows credit to large industries, stood at R9,71,900 crore at the end of January, 2014, up 13% y-o-y; the growth in the comparable period of 2012-13, was a more robust 18.2%. At Axis Bank, corproate loans shrank as a share of total advances from 53% at the end of December 2012 to 46% at the end of December, 2013; the corporate loan book grew 2.25% y-o-y. IOB’s large corporate portfolio grew 10.33% y-o-y to R1, 52, 492 crore at the end of December, 2013. Non-food credit grew at 15% y-o-y to R58,37,218 crore in the fortnight to March 7, 2014; this is in line with the RBI’s projection of 15% for FY14.
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