In a move that will help it align its loan rates to smaller companies with those of its peers, Union Bank on Wednesday said it was slashing rates by as much as 200-375 basis points for such customers. The revised interest rate for investment-grade borrowers in the micro, small and medium enterprises (MSME)segment, the public sector lender said, would range between 12.25% and 13.75%.
Three weeks ago, Axis Bank reduced its base rate by 10 basis points to 10.15% to bring it closer to those of its peers such as ICICI Bank and HDFC Bank whose base rates are at 10%. In a competitive environment in which the offtake of credit has been slow, banks have been lowering rates for customers; State Bank of India (SBI) chairman Arundhati had told FE a few months ago that corporates rated AA were able to borrow
at base rates because bankers had been left with very few options to grow their loan books.
K Subrahmanyam, executive director, Union Bank, said that the bank’s lending rates to the MSME segment had been higher than those of its competitors. “We have been wanting to lend more to retail, agriculture and MSME sectors and the cut would ensure we see more credit being deployed to MSMEs,” Subrahmanyam added.
Union Bank has close to R3,000 crore of excess liquidity which it has been deploying in the money markets. The lender’s MSME advances grew a steep 31.6% year-on-year in the September quarter but slippages — standard loans turning into non-performing assets — stood at R358 crore, higher than the R226 crore seen in the March quarter.
In the absence of a pick-up in the demand for loans, bankers have been flush with funds and have been attempting to reduce their cost of deposits. Over the past three months, several banks have lowered deposit rates, including, SBI, Punjab National Bank, Bank of Baroda and Indian Overseas Bank.
The lower rates could impact Union Bank’s net interest margins, analysts said, given the lender is unlikely to be able to drop deposit rates by an equivalent amount.
The bank said that it classifies medium enterprises into two classes: Manufacturing enterprises engaged with investment in core plant and machinery more than R5 crore up to R10 crore, and service enterprises engaged in rendering services with investment in core equipment more than R2 crore up to R5 crore.
“MSME is a dynamic and vibrant sector of our economy that nurtures entrepreneurial talent besides meeting social objectives including that of providing employment to a sizeable number of people across the country,” the bank said in the statement.