SBI Corporate Loan Book Hints at Shift in Market Dynamics

MUMBAI : Indian banks are realizing that in order to see sustainable growth in corporate credit, they must also invest in the debt securities of their borrowers, signaling a change from their lending-driven growth strategy.

India’s largest lender, State Bank of India, reported 2.6% total business credit growth in FY21, including loans and debt securities such as bonds and commercial papers; however, if only loans are taken into account, SBI’s corporate ledger contracted by 3%.

Granted, SBI has been saying for several quarters now that corporate bonds should be added to the loan portfolio to measure the true extent of growth. However, it was not until fiscal year 2021 that bond subscriptions managed to pull the bank’s corporate credit portfolio out of negative territory.

Bank chairman Dinesh Khara pointed out that the use of working capital for large companies is even less than 70% and that the bank is looking to help them raise funds in the debt market. However, while large companies with better credit ratings are able to tap into the bond markets, smaller companies are struggling and still rely on bank loans.

“Large companies also have the opportunity to raise funds in the bond market. This is how we started to take that into account as well. We support them in their efforts to raise funds in the bond market. It will be the reality for big companies, ”Khara said.

At least for now, it does not appear that such policies would lead to a deepening of 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 meeting corporate financing needs. In its January 2019 newsletter, it said demand for corporate bonds as an investment was mostly confined to institutional investors, with retail investors accounting for just 3% of outstanding issues.

The data suggests that the second wave not only impacted credit growth, but also fundraising in the debt market. Localized lockdowns, although seemingly milder than national restrictions imposed last year, have hampered the flow of goods and services and forced businesses into a wait mode.

In April, corporate bond issues fell 71% from the previous month to ₹27,888 crore, showed provisional data from Prime Database, compiled by CARE Ratings. Likewise, commercial paper emissions in April 2021 were significantly lower than ₹89,576 crore, a decrease of 60% from the previous month.

“The second wave of the covid-19 pandemic and the localized lockdowns that resulted from it in April 2021 led to a drop in the short-term fund requirements of companies,” the rating agency said in a May 14 report. .

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

Khara believes that apart from personal loans, growth would also come from the mid-sized and small business segments.

“Hopefully with improved demand there would be a better use of working capital limits. In addition, some of the projects for which conditional loans have already been sanctioned, we anticipate that they will be used as the current foreclosure would have delayed some of these plans, ”he added.

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