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Banks are starting to experiment with corporate credit linked to external benchmarks, as they compete with bond markets and the loan new pricing system, first introduced in 2019, settles in.
In an attempt to retain top corporate borrowers, who currently have a wide array of financing options, large banks are offering short-term term corporate loans linked to an external benchmark. In most cases, this is the Reserve Bank of India’s repo rate, currently at 4%.
Lenders such as State Bank of India, Axis Bank Ltd. and Union Bank of India are among those who have been offering short-term corporate loans linked to an external benchmark. For now, these products are aimed at borrowers rated AA or above. These loan products allow borrowers to draw bank funding at a cost of around 5.5-6%, which is comparable to borrowing from the bond market today, bankers said.
Banks Tip-Toe Towards External Benchmarking Of Corporate Loans
“To ensure that the well-rated corporate borrower has more reason to come to the bank, we have been offering short term working capital loans linked to an external benchmark to them,” said Rajiv Anand, executive director of wholesale banking at Axis Bank. “Companies which have the ability to borrow from multiple sources have been using this facility to control costs.”
A senior official at Union Bank of India, speaking on condition of anonymity, said the lender has started offering ultra short-term corporate loan products linked to the repo rate to its AAA and AA-rated customers as well as some top government enterprises. The product offers credit for three months and has near-zero default rates owing to the highly-rated borrowers.
“We have seen instances of banks providing either fresh loans or investments to companies by linking the lending rate to an external benchmark,” Anil Gupta, vice president at ICRA Ltd., said. “In the case of loans, banks have to be careful that the effective lending rate does not fall below the prevailing MCLR for such loans. However, they can provide loans at a lower cost, which they are doing.”
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Banks Tip-Toe Towards External Benchmarking Of Corporate Loans
While helping banks compete with bond markets better, these products also help banks manage liquidity better, since parking funds in the Reserve Bank of India’s reverse repo window earns them only 3.35%.
By offering rates competitive with the bond markets, banks are able to better sell the advantages of credit they offer vis-a-vis funds raised via debt issues. According to a senior official at State Bank of India, who spoke on condition of anonymity, accessing working capital loans from banks lets a borrower spread borrowings over the year, as compared to the bond market where fundraising usually happens in one or two tranches for a larger amount.
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