India Inc could shift gears when it comes to raising short-term resources, moving away from commercial papers towards bank credit, following implementation of a new lending rate regime by banks with effect from April 1.
Credit rating agency India Ratings and Research (Ind-Ra) has estimated that up to ₹1.20-lakh crore of short-term resources raised by India Inc via commercial papers are likely to flow back into the banking system as rates get competitive.
In a report the agency said the implementation of the Marginal Cost of Funds-based Lending Rate (MCLR) has the potential to channel the recent surge of volumes in the commercial paper market towards bank credit.
According to the agency, existing large corporate borrowers may be able to negotiate with banks, to shift their loans to MCLR, putting downward pressure on the margins. Aggressive refinancing of better-rated corporates by banks with lower MCLRs is likely and it can further dent the competitiveness of many mid-sized public sector banks which are running high asset-liability management (ALM) gaps.
Outstanding commercial paper borrowing as a percentage of short-term bank credit has gone up to 14 per cent in FY16 (from 11 per cent last year) and Ind-Ra says 3-5 per cent of this, which is ₹74,500 crore to ₹1.20 lakh crore, is likely to flow back into the banking system as rates get competitive.
Ind-Ra expects the shortest tenor MCLR for bigger banks to be around 90-100 basis points (bps) lower than the base rate, while making it comparable to commercial paper rates with similar tenor.
On the longer end (one-year rate) considering the 70-75 bps of tenor premium evident in the market, the difference from the base rate can be around 25-30 bps. One basis point is equivalent to one-hundredth of a percentage point.
MCLR has been ushered in to expedite monetary policy transmission along with augmenting uniformity and transparency in the calculation methodology of lending rates.
Varying impactInd-Ra says that banks’ margins in FY17 will face downward pressure on the back of this transition to the MCLR regime.
The impact, however, will be different across banks, based on the variances in their ALM gaps, floating rate book, current account savings account (CASA) ratios, share of borrowing in the funding profile and differences in their operating cost structure. Banks with a higher share of stable CASA could see a lower impact.
Ind-Ra believes that banks with a relatively higher mix of domestic borrowing (in the form of longer tenor senior or subordinated debt) will be better positioned (in the current decreasing interest rate scenario), as the MCLR calculations would entail borrowing costs to be computed on an average basis.
The MCLR computation also factors in all operating costs, which will mean inefficient banks get penalised. Additionally, the MCLR provides flexibility to banks to re-price their floating rate book, compared to the base rate regime.
Ind-Ra expects bank yields and margins to be volatile in the new regime and prudent ALM will become even more critical in managing competitiveness through interest rate cycles.