Bonds, CPs float higher as companies ditch costlier loans

New Delhi,Manju AB: While retail lenders have to cough up base rate or a mark-up over the base rate for their home, car or personal loans, banks are lending to the industry at rates lower than the base rate by investing into commercial papers or bonds floated by companies.

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According to data released by the Reserve Bank of India (RBI), for the fortnight ended December 15, banks have invested a whopping Rs 52,000 crore into commercial papers of various companies at rates anywhere between 7.08% to 12%, depending on the risk profile of the company. At 11% from a year ago, the bank credit growth during the fortnight ended December 15 was well above the average rate of growth this fiscal, with refinance opportunities and working capital requirements from companies.

Some projects in road sector, non-renewable sector, and other infrastructure are also showing nascent signs of revival with the government restarting its spend. However, the aggregate credit growth data for the banking sector until October 30 shows the pace of growth slackening for industry and rising for the retail borrowers.
The year-on-year growth for the micro and medium scale industries slowed down 4.2% to Rs 3,80,000 crore, while the bank credit for the medium industrial segments de-grew 9.1% to Rs 1,12,700 crore. Bank credit for the big industry slowed down to 4.2% to Rs 21,67,700 crore. Deep Narayan, former director at Fitch India, said, “Bank treasuries are investing into the commercial papers of the companies and it is resulting in the sensitive sector exposures looking bloated. Often, when accounts cannot be restructured, bank treasuries are providing additional funding to the companies from their treasuries.”
Though the bank credit growth is tepid, banks that are flush with liquidity are forced to invest their cash in the commercial papers that companies float. A senior banker with a public sector bank said, “Banks are putting investible surplus into commercial papers where the interest rates are often lower than the base rate. The loans are in way getting camouflaged like this, but banks are also helpless as there is no demand for credit.”
Increased share pledge from companies and conversion of debt to equity is also showing that capital market exposures of banks are going up. Capital market, real estate market and commodities market have been classified as sensitive sectors as fluctuations in prices of underlying assets in these sectors could adversely affect the asset quality of banks, the financial stability report of the central bank released last week said. In 2014-15, sensitive sectors accounted for 18.5% of the total loans and advances of banks.
Within these sensitive sectors, more than 90% comprised lending to real estate market. However, in line with overall trend, credit growth to sensitive sectors also witnessed a decline on account of lower growth in lending to real estate market. Nevertheless, lending to capital market recorded higher growth during 2014-15. At the bank group level, in both the sectors, foreign banks’ exposure was highest followed by private sector banks.