Corporates are flocking back to banks for funds as alternative sources of funding such as domestic bond markets and overseas borrowings have become costly.

Commodity prices

Besides the aforementioned reasons, the pick-up in bank credit is also due to the draw-down of unutilised limits by India Inc, in the backdrop of rising commodity prices.

As on June 3, 2022, the credit offtake from (all scheduled) banks was robust at 11.88 per cent year-on-year (y-o-y), according to Reserve Bank of India (RBI) data. The y-o-y bank credit growth as on June 4, 2021, was lacklustre at 5.61 per cent.

The reason for the heathy credit demand is that the marginal cost of funds-based lending rate (MCLR), against which most corporate loans are priced off, have not moved up as much as the non-convertible debenture (NCD) and commercial paper (CP) rates following the RBI’s 90 bps hike in the policy repo so far in FY23, said a senior public sector bank (PSB) official.

For example, State Bank of India’s one-year MCLR has increased only by 40 bps from 7 per cent to 7.40 per cent in FY23, while the policy repo rate rose 90 bps from 4 per cent to 4.90 per cent.

However, bond market interest rates have shot up much more than the hike in repo rate.

Interest rates on commercial papers (CPs) have shot up 90-135 basis points since March-end so far. Interest rates on three-year corporate bonds (rated A and above) have jumped about 150 basis points. 

Resources raised by India Inc via external commercial borrowings (ECBs) dwindled sharply to $361.6 million in April, with interest rates in advanced economies going up.

Indian corporates had raised $2.368 billion in April 2021 and $5.029 billion in March 2022 via the ECB route due to relatively lower global interest rates.

“Lending rates for corporates have not moved up much since these loans are priced off MCLR. But bond markets rates have gone up much more than the increase in repo rate. The transmission of the repo rate hike to money and bond markets is seamless.

“External Commercial Borrowings too have turned costly due to sharp tightening of policy rates by several advanced economies. So, corporates are turning to Banks for funds,” said an economist with a bank.

While the increase in MCLR can be absorbed by corporates, the rise in external benchmark lending rates (EBLR), which are priced off the repo rate, could impact retail borrowers, with the possibility of rise in defaults, said the PSB quoted above.