Trend reversal: Bank lending rates, bond yields begin to converge

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Published: February 26, 2019 2:36:39 AM

Data released by the central bank last week show that the minimum marginal cost of funds-based lending rate (MCLR) at a public sector bank (PSB) stood at 8.5%, only slightly higher than the minimum MCLR at a private bank at 8.45%.

If the weighted average lending rates (WALRs) on fresh loans were to be considered, a borrower would be charged 9.38% by a PSB and 10.44% by a private bank in December. (Reuters)

Banks’ lending rates and bond yields began to converge in December 2018 in a seeming reversal of a months-long trend of bank loans being cheaper than market borrowings, brokerage Kotak Institutional Equities (KIE) said in a report on Monday, based on the Reserve Bank of India (RBI) data on loan rates for the month.

Data released by the central bank last week show that the minimum marginal cost of funds-based lending rate (MCLR) at a public sector bank (PSB) stood at 8.5%, only slightly higher than the minimum MCLR at a private bank at 8.45%. This is almost at par with what an ‘AAA’-rated corporate or non-banking financial company (NBFC) would shell out for its market borrowings in December.

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If the weighted average lending rates (WALRs) on fresh loans were to be considered, a borrower would be charged 9.38% by a PSB and 10.44% by a private bank in December. In comparison, companies with an ‘AA’ rating could borrow at 9% and those rated ‘A’ at 10.2% in the markets.

“We do see that overall yields (on advances by banks) have improved, suggesting the upward re-pricing of the back book due to an increase in MCLR rates.

The gradual rise in yields has led to a situation where the spread between bank funding and bond rates have gradually started to converge,” KIE analysts observed in the report.

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For much of 2018, banks had been the preferred port of call for borrowers as interest rates in the bond markets hardened. Yields on ‘AAA’-rated bonds had moved up to levels of 8.4% in June – a shade higher than State Bank of India’s one-year MCLR of 8.25% and on par with that of HDFC Bank, ICICI Bank and Punjab National Bank.

Since August 2018, the cost of borrowing from banks had been rising for all categories of NBFCs, Care Ratings said in a recent report.

“The picture emerging is that ‘AAA’-rated NBFCs, housing finance companies, alternative investment funds (AIFs) and non-NBFCs have largely been able to raise funds at a lower cost from the corporate bond markets compared with the WALR and base rate,” the rating agency said, adding that HFCs witnessed the highest interest rates among all categories of NBFCs.

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