The Reserve Bank of India's 0.25 percent rate increase made benchmark-linked bank loans significantly more expensive due to added credit risk premiums. AAA-rated entities tapped the domestic bond market instead, securing October funding at coupon rates spanning 8.13 percent to 8.85 percent. For instance, state-run REC raised Rs 4,000 crore via five-year bonds at 8.30 percent, undercutting State Bank of India's 8.65 percent lending rate. Rating agency Icra warned that ongoing sovereign yield increases could eventually compress this corporate borrowing spread.
Key points
External benchmark-linked bank loans have become less competitive due to added business a…: External benchmark-linked bank loans have become less competitive due to added business and credit premiums.
Rising crude oil prices and anticipated rate increases threaten to push debt market yield…: Rising crude oil prices and anticipated rate increases threaten to push debt market yields higher.
Long-term corporate credit growth may face headwinds as the spread between bank loans and…: Long-term corporate credit growth may face headwinds as the spread between bank loans and bonds narrows.
Sources checked by our analysis pipeline: 1
Data compiled by PTI showed that AAA-rated corporates raised funds at coupon rates ranging from 8.13 per cent to 8.85 per cent so far in October.
The bond issuances came right after the Reserve Bank of India's (RBI) monetary policy review earlier this month, in which the central bank hiked rates by 0.25 per cent and also shifted the policy stance to calibrated tightening.
Yields on India's battered government bonds may be approaching territory that more investors consider a "buy", with that on the benchmark 10-year approaching 7.50%, a level not seen in four years.
Experts said borrowing through bonds can be cheaper than bank loans linked to external benchmarks, as the latter carry additional premiums over the benchmark lending rate.
The effective lending rate will work out to be 8.65 per cent for a loan from SBI, the country's largest lender, which includes the external benchmark-linked lending rate (EBLR) at 8.15 per cent, plus the Credit Risk Premium (CRP) and Business Strategy Premium (BSP), Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP, said.
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