Small borrowers to gain as large companies ditch banks for cheaper corporate debt

For the time being, it appears that capital-constrained banks would have to remain as passive players in the game. But, the good news is that with companies increasingly moving to the bond market from banks, small borrowers—institutions and individuals—would get greater attention in the bank-loan market.

An increasing shift by top-rated companies from banks towards corporate debt market would mean more pain for the lenders in the form of a prolonged phase of low credit-growth. This, in turn, would eventually force them to focus more on the long-ignored customer segment—the small borrower.The early signs of such a trend are already visible.Companies are moving towards corporate debt market primarily due to the lower rate offered in the market and also because banks, especially public banks, are severely capital constrained.[caption id="attachment_2020961" align="alignleft" width="380"] Reuters[/caption]The government has nearly halved the capital infusion in state-run banks this year to Rs 8,000 crore after failing to infuse the promised capital in the previous fiscal year, creating a crisis situation for small and medium sized public banks.Corporate debt market is clearly becoming an attractive option for companies due to the price advantage. Currently, most banks have their base rates, or minimum lending rates, at around 10 percent, whereas corporate bond yields have dropped significantly over the last year.For instance, the yield on 10-year corporate bond yield fell sharply to 8.31 percent from 9.67 percent a year back. The yields might soften further if the Reserve Bank of India (RBI) reduces the key rates further, which makes floating papers in the market more attractive for companies than tapping bank loans.In the last one year, Indian companies have raised a total of Rs 3.15 lakh crore by way of 2117 private placements as compared with Rs 2.76 lakh crore in the year before from 1924 issues. Companies raised Rs 9048 crore through 22 public issues in 2014-15 against  Rs42,382 crore in the year before from 35 issues.

This is a double whammy for banks, which have already seen a drop in loan demand due to prolonged economic slowdown.Bank lending to industries have painfully slowed in the recent years. According to RBI data, till January, bank credit to industry increased only by 6.6 percent as compared with an increase of 13.6 percent in the year-ago period. The central bank observed that the deceleration in credit growth to industry was observed in all major sub-sectors.Going ahead, banks will have to eventually let go of a sizeable chunk of their corporate clientele and pay more attention to relatively smaller lenders such as small and medium enterprises (SMEs) and retail borrowers to keep the show on.Declining interest from corporations for banks loans could inflict more pain for state-run lenders, which have built up large corporate loan portfolios. In the recent years, banks have continued to enjoy corporate loan demand in the backdrop of a shallow corporate debt market. But this trend is changing with the debt market gaining more depth backed by regulations and fresh investors appetite. “This shift, if any, would be negative for banks, especially for public banks, which have a disproportionately high share of lending in the corporate book,” said a report by Kotak Institutional Equities.The bottom line is any significant revival in bank loan growth is unlikely to happen in the foreseeable future, since there are no strong, convincing signs of economic recovery yet and shift of focus by companies for cheaper alternatives.For the time being, it appears that capital-constrained banks would have to remain as passive players in the game. But, the good news is that with companies increasingly moving to the bond market from banks, small borrowers—institutions and individuals—would get greater attention in the bank-loan market.It is an irony that in the past, banks have always chosen to charge the retail borrowers high, while offering money to companies at cheaper rates. The game is set to change with small borrowers set to finally get some attention by banks.(Data support from Kishor Kadam)