SBI’s corporate loan book suggests a change in market dynamics


MUMBAI : Indian banks are realizing that they must also invest in their borrowers’ debt in order to achieve sustained growth in corporate lending, which signals a departure from their credit-driven growth strategy.

India’s largest lender, State Bank of India, saw corporate lending growth totaling 2.6% in FY21, including loans and debt such as bonds and commercial papers. However, if one only takes into account loans, SBI’s business book shrank by 3%.

Of course, SBI has been saying for several quarters that corporate bonds should be added to the loan book to measure the true extent of growth. It was not until the 2021 financial year that the bond subscriptions managed to get the bank’s corporate loan book out of negative territory.

The chairman of the bank, Dinesh Khara, pointed out that the working capital utilization of large companies is even below 70%, and the bank wants to help them raise money from the debt market. While the larger companies with better credit ratings are able to enter the bond markets, smaller companies find it difficult and they continue to rely on bank loans.

“Large companies also have the opportunity to raise funds from the bond market. So we expected it. We support them in their efforts to raise funds from the bond market. For the big corporations, this will be a reality, “said Khara.

For now, at least, it does not seem that such a policy would deepen the bond market, as these investments would be limited to large borrowers.

The Reserve Bank of India (RBI) has long argued that developing a deeper corporate bond market is essential to meet corporate funding needs. Its January 2019 bulletin stated that demand for corporate bonds as an investment is mostly limited to institutional investors, with retail investors accounting for only 3% of outstanding issues.

Data suggests that the second wave impacted not only credit growth but also debt-market fundraising. Localized bans, though milder than the nationwide restrictions imposed last year, have hampered the movement of goods and services and put businesses on hold.

In April corporate bond issues fell 71% from the previous month £27,888 crore showed preliminary data from the Prime database compiled by CARE Ratings. Similarly, commercial paper issues were significantly lower in April 2021 £89,576 crore, a decrease of 60% from the previous month.

“The second wave of the Covid-19 pandemic and the resulting localized lockdowns in April 2021 have resulted in companies requiring fewer funds in the short term,” the rating agency said in a May 14 report.

While companies would benefit from moving to bond markets, banks on the margin front are likely to lose. For example, while banks’ mean one-year marginal cost of fund-based lending rate (MCLR) was 7.3% in April, the weighted average return on corporate bonds over the same period was 6.24%.

Khara assumes that the growth will come from the medium and small business segments as well as retail lending.

“With an improvement in demand, hopefully the resource limits would be better used. We expect to be drawn on some projects that have already approved term loans as the current lockdown would have delayed some of those plans, “he added.

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