Cutthroat battle between private banks to buy up government bonds


It’s an uphill battle between private lenders with leading names like HDFC Bank, Kotak Mahindra Bank and IndusInd Bank vying for the cream of corporate lending. Sovereign- or quasi-sovereign-rated term loans from state-owned companies are being poached by private banks like hot cakes at interest rates as low as 4.5 percent, that is, a spread of just half a percent over the current repo rate of 4 percent. The aggressive rush for these high-quality loans stems from the Reserve Bank of India’s August 2020 circular on “Opening Current Accounts by Banks – Need for Discipline”, which requires banks to maintain a minimum 10 percent exposure to a borrower’s term loans to have to manage the borrower’s checking account.

At times, this dictate resulted in some private banks losing out on checking account deposits. To get back on their feet, some banks are rushing to lend to state-owned companies at unprecedented interest rates. “Leading public sector banks (PSBs) are unwilling to underwrite these loans at such low interest rates because they believe the deal will not be profitable in the long run,” said one banker who is aware of the matter. PSBs stay away from price wars. “They’re comfortable with an interest rate of 5.5-6 percent interest rate, but no lower. Therefore, if a borrower makes a counter-offer from a private bank, PSBs can let go of such accounts,” the person cited above added.

As private banks remain reluctant to increase exposure to non-sovereign and A-rated companies or below, much of the long-term credit demand from these companies is met by public sector banks. These loans allow for a better risk assessment, and thus public financial institutions are more accommodating to such borrowers than price warring private banks to retain prime government accounts.

Meanwhile, private banks rely heavily on the cash management business expected of SOEs. Last year, the RBI eased the embargo on government transactions, opening the way for greater participation by private banks. The big SOEs are expected to park their funds in checking accounts in addition to interest income, which will help banks generate the float revenue. “G-Secs are trading at over 6.8 percent and this should significantly boost interest income on these government and quasi-government loans,” said a senior private bank official. In other words, lower profitability on these loans is offset by higher Treasury profits.

As competition in the retail banking sector intensifies, poaching high-value corporate accounts for a low interest rate is seen as a surefire way to grow the balance sheet, although it’s not very margin-enhancing in the short term.

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