August8 , 2022

Private banks soft-pedal corp loans as PSBs up their game


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MUMBAI : Leading private sector banks are taking a step back from some segments of the corporate loan market, citing intense competition, as their state-owned peers aggressively try to woo large borrowers with finer interest rates.

While State Bank of India has always been present in almost all consortium loans, mid-sized and even smaller public sector banks are approaching companies to be part of such agreements. Some have even formed separate teams that would reach out to borrowers instead of waiting for corporate clients to approach them. However, this aggressive stance has prompted private banks that are more sensitive to margins to put the brakes on some negotiations.

Private banks such as Kotak Mahindra Bank and HDFC Bank saw their corporate loan books stagnate in June compared to the previous quarter, while Axis Bank witnessed a 6% contraction. Multiple private sector bankers said they decided not to engage in aggressive loan pricing at the cost of margins; instead opting only for deals where they can meet their internal metric of risk-adjusted return on capital.

For instance, India’s largest private lender HDFC Bank let go of wholesale loans worth 40,000-50,000 crore in the first quarter of 2022-23. Srinivasan Vaidyanathan, chief financial officer of the bank, said that sometime around May, when interest rates started moving up, some customers were offered lower rates by other lenders.

“….we do not want to cut back on our rates to keep them. So, we said that it is fine to let go; let somebody else take it at a lower price than where we do,” Vaidyanathan told analysts on 16 July but did not disclose whether these loans were taken over by a public sector or a private sector competitor.

Some other private lenders seemed to have faced similar circumstances in the June quarter, as competition to get hold of well-rated borrowers gathered steam.

“In the market, we saw extremely high price pressures and margin pressures in the corporate segment clearly in the last quarter. There’s a significant amount of irrational pricing in the market, and we decided to stay away from some of those transactions,” said K.V.S. Manian, whole-time director, Kotak Mahindra Bank.

In its earnings call on 23 July, Manian said the bank had done more credit substitutes in the June quarter, which have grown from 21,227 crore in the March quarter to 23,458 crore as on 30 June. Apart from lending to corporate clients, banks also invest in bonds issued by corporates, known as credit substitutes. “When there is pricing pressure, we also tend to do a bit more of credit substitutes,” said Manian.

Meanwhile, in a call with reporters on 25 July, Rajiv Anand, deputy managing director at Axis Bank, said intense competition among banks in the corporate loan market has led to some amount of mispricing of liquidity. The issue of mispricing in the corporate loan market was pointed out by SBI chairman Dinesh Khara in September last year; at that time, interest rates were significantly low, owing to RBI’s loose monetary policy in the face of covid-19 that left the system in a liquidity slush.

Public sector lenders were once at the helm of infrastructure financing; after stepping back following the last round of bad loans, they seem to be back in the market with aggressive bets aimed at outpricing competitors. An example is SBI, India’s largest lender, which has underwritten the entire exposure to some of the recent large corporate loan syndications to the Adani Group and Jindal Steel and Power Ltd (JSPL), although eventually selling some of it to other banks.

Experts are somewhat circumspect about the trend and believe that the situation will depend on the kind of corporate lending opportunities available in the market, irrespective of the ownership of the lender.

“The credit-deposit ratio has been low throughout the covid-19 period, and banks have a lot of treasury assets and surplus liquidity with them. They would thus want to deploy them in whatever best opportunities are available in the market,” said Sanjay Agarwal, senior director, CareEdge Ratings (formerly Care Ratings).

To that extent, there could be some pressure on the pricing of large-ticket loans, Agarwal said, adding that it is not a question of the public sector outpricing the private sector but the opportunities available right now and things that could rapidly change in the coming months.

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