After almost four years banks are once again the preferred port of call for borrowers as interest rates in the bond markets harden. Yields on AAA-rated bonds have moved up to levels of 8.4%; that’s a shade higher than State Bank of India’s (SBI) one-year marginal cost of funds-based lending rate (MCLR) of 8.25% and on a par with that of HDFC Bank, ICICI Bank and Punjab National Bank (PNB).
Most Tier I lenders had raised interest rates much ahead of the Reserve Bank of India’s (RBI) first rate hike in four-and-a-half years last Wednesday when it hiked the key repo rate to 6.25%. The rest have done so in the past couple of days. With deposits coming in at a much slower pace lenders have also been forced to offer savers more.
The big losers, as the interest rate cycle turns, will be non-banking financial companies (NBFCs), the biggest borrowers in the bond market. Bank too have lent large sums to NBFCs over the past year; loans outstanding to NBFCs stood at Rs 4.52 lakh crore, as on April 28, 2018, up 29.5% y-o-y. On April 28, 2017, the outstanding was down 4.4% over previous year.
Apart from the sharp spike in bond yields—150 basis points between last August and now—interest rates have hardened also because of intermittent liquidity deficits over the past three or four months. In comparison, there were liquidity surpluses in 2016 and 2017 as credit off-take slowed sharply as companies flocked to the bond markets, even those that were not top-rated.
A year back, bonds were growing at 23% y-o-y, significantly faster than bank credit growth, which stood at 4%. That has reversed; in March 2018, bank credit grew 10% year-on-year (y-o-y), only a tad slower than the 11% rise in the outstanding value of bonds. The quantum of money mopped up in 2016-17 was Rs 3.9 lakh crore; in 2017-18, it was Rs 3.3 lakh crore.
Banks may hold rates unless liquidity is once again in short supply. PK Gupta, MD, SBI, said recently further hikes would depend on how liquid banks are. “The market is in surplus liquidity mode now I don’t really think the RBI rate hike gets transmitted to either the deposit or the lending rates immediately,” Gupta said.
Retail loans have dominated lending for a while now, a trend unlikely to reverse soon. ICICI Bank MD and CEO, Chanda Kochhar observed recently the lender would look to raise retail loans to 60% of its loan book by March 2019 from 57% at present. “We have adopted a new approach to corporate lending. We have set up hard limits for group and borrower exposure, which are based on ratings and past track record,” Kochhar said.