Indian banks' corporate lending set for revival on narrowing rate gap

Corporate lending by Indian banks, which has lagged, could see a revival as the interest rate gap between bonds and bank rates narrows, according to an Ambit Capital report. Regulatory support from the RBI is also expected to boost this growth.

Corporate lending by Indian banks, which has lagged overall credit growth in recent years, could see a revival in the coming quarters as borrowing cost differentials narrow and regulatory support improves, according to a latest report by Ambit Capital.

The interest rate gap between bond yields and benchmark rates (EBLR/MCLR) is a key factor driving this shift, it said. The report noted that banks' loan growth to corporates has remained muted since the pandemic, largely due to aggressive deleveraging by companies and a shift towards alternative funding sources such as bonds, commercial paper and overseas borrowings.

Corporate debt-to-equity ratios have declined sharply to around 0.7-0.8x in the Financial Year 2024 from about 1.0-1.1x before Covid, supported by strong internal accruals and better access to equity markets, the report said.

Impending Shift to Bank Lending

"Interestingly, we observe that as the rate-gap narrows, bank corporate lending surges, which may materialize in the coming quarters. Moreover, recent policy reforms by the RBI (like risk weight reduction, ease in large exposure norms) could support growth pick-up, while adoption/margin profile of acquisition finance remains a monitorable," the report added.

Beneficiaries and Strategic Focus

Large banks and PSBs remain key beneficiaries of growth pick-up, while focus may remain on lower-rated accounts (AA/A) to manage margins, it said.

It further highlighted that as companies reduced reliance on bank borrowings, system-wide corporate credit growth trailed overall non-food credit growth. It said a persistent interest rate gap, where bond yields remained lower than bank lending rates linked to MCLR and EBLR, encouraged corporates to tap capital markets instead of banks.

On strategy, it expects banks to tilt towards AA and A-rated borrowers to balance yields and asset quality, while remaining cautious on lower-rated and unrated exposures.

Favourable Regulatory Environment

The Reserve Bank of India's recent rollout of various guidelines and draft reforms marks a structural shift towards a more accommodative environment for institutional credit. By softening the various policy restrictions, the regulator is signalling strong support for banks to re-engage with the corporate sector as a credit growth engine, the report added. (ANI)

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