High-rated corporates – AA and above – are increasingly seeking loans linked to external benchmark-linked lending rates (EBLR), said bankers. The shift, which is happening in the past few months, is being largely driven by the desire to benefit from policy rate cuts and rising bond market yields.
“Corporates are demanding to shift to EBLR loans since there is an expectation that the Reserve Bank of India (RBI) might cut rates in December. This will lead to faster repricing as well,” Binod Kumar, MD & CEO, Indian Bank said.
A senior official at state-owned banks added that strong corporates tend to negotiate harder with banks for EBLR loans since banks also want to retain them. The trend became stronger from the second quarter.
Tribhuwan Adhikari, MD & CEO, LIC Housing Finance said that this year, the focus is on raising most of the required funds from banks, mainly through loans linked to other external benchmarks, as a falling interest rate scenario makes them more attractive.
He added that borrowings through non-convertible debentures (NCDs) at the moment are turning out costlier than bank loans, with bank borrowings available at approximately 6.85–7% for five years, while bonds are priced at 7.10 to 7.15%.
The RBI mandates EBLR for all floating-rate retail loans and loans to micro, small, and medium enterprises (MSMEs). For corporate loans, interest rates are typically linked to the marginal cost of funds-based lending rate (MCLR).
EBLR was introduced in 2019 to ensure better transparency and faster transmission of the monetary policy. The external benchmark rate is either linked to the repo rate or the Treasury-bills.
For the banking industry, the overall share of EBLR loans 62.9% in June from 57.9% a year ago. Similarly, the share of loans linked to MCLR fell to 33.8% in June from 38.2% a year ago, the latest data from RBI showed. The lenders’ focus on retail and micro, small and medium enterprises (MSME) segments is driving the share of EBLR loans.
The RBI has also been aggressive in delivering rate cut. Since February, it has delivered a 100-bps rate cut and the transmission of these cuts have been seen in fresh loans.
Followed by the beginning of rate cut cycle, corporates frontloaded borrowings in the first quarter (April-June), raising a record high of over Rs 3.44 lakh crore, according to data from Primedatabase.
However, the issuances fell to Rs 2 lakh crore in the second quarter (July-September), as yield hardened after RBI changed the stance to ‘neutral’ from ‘accommodative’. Further, a lot more factors weighed negatively on the market, keeping yields elevated since then. The yield on 10-year AAA paper rose more than 20 basis points since the June policy.
