Private banks fight for PSU business with ultra-low rates

It’s a battle between private lenders with top names such as HDFC Bank, Kotak Mahindra Bank and IndusInd Bank vying for the cream of business lending. Term loans from state-owned enterprises with sovereign or quasi-sovereign ratings are being poached like hotcakes by private banks at interest rates as low as 4.5%, or just 0.5% spread over the current repo rate of 4%. The aggressive rush for these high quality loans is due to the Reserve Bank of India’s August 2020 circular on “opening of current accounts by banks – need for discipline” which required banks to have a minimum exposure of 10% to a borrower’s term loans manage the borrower’s current account.

This diktat temporarily caused some private banks to lose current account deposits. To regain ground, some banks are rushing to lend to state-owned enterprises at rates never seen before. “The main public sector banks (PSBs) are not willing to underwrite these loans at such low rates because they believe the business will not be viable in the long term,” said a banker familiar with the matter. PSBs stay away from price wars. “They are comfortable with an interest rate of 5.5 to 6%, but not lower. Therefore, when a borrower presents a counter-offer from a private bank, PSBs are allowed to drop those accounts,” the person quoted above added.

In addition, with private banks still reluctant to increase their exposure to non-governmental companies and those rated A or below, much of the demand for long-term credit from these companies is met by public sector banks. These loans allow for better pricing of risk and therefore PSBs are more open to these borrowers, rather than entering into a price war with private banks to maintain higher quality public accounts.

Meanwhile, private banks are heavily dependent on cash management activities that public companies are expected to bring. Last year, the RBI eased the embargo on government activities, opening the door to greater participation by private banks. It is expected that large state-owned enterprises, in addition to generating interest income, will also place their funds in current accounts, which will help banks generate floating income. “G-secs are trading at over 6.8% and that should significantly boost interest income from these sovereign and quasi-sovereign loans,” said a senior private bank official. In other words, the decline in profitability of these loans should be offset by higher cash gains.

With competition in the retail industry intensifying, poaching high-rated business accounts for low interest is seen as a safer way to grow the balance sheet, although it’s not very accretive in the short term.

Published on

April 03, 2022

Comments are closed.