MUMBAI: Corporates borrowers are finding loans linked to the marginal cost of lending rate (MCLR) more attractive than the new benchmark repo rate-linked loans. Companies that availed loans linked to the repo in the wake of successive reductions by the RBI are now looking for a way out in the wake of back-to-back rate hikes.
“Unlike the repo-linked rates, the MCLR goes up when the incremental cost of deposits go up. Corporates with term loans linked to the repo rate are now looking at switching to the MCLR,” said IDBI Bank deputy managing director Samuel Jebaraj.
Since May 2022, the RBI has hiked the repo rate by 140bps and is likely to increase them by another 50bps this week. Compared to repo rates, deposit rates have only increased marginally. “Around 55% of our deposits are current, and savings account where the cost of funds has not gone up. Even within term deposits, the share of costlier bulk deposits is 10%,” said Jebaraj. As a result, the bank’s cost of funds is only 3.6%.
Jebaraj said that because of this headroom, the lender is able to grow its corporate loan book by 18% without pressure on funds. “We will continue to maintain the ratio of retail and wholesale at 60:40 as a prudent measure. Unlike corporates, retail loans do not have business cycles and from a balance sheet risk point of view, it is better to have more granular risks,” he said.
According to Jebaraj, the demand for corporate credit is rising because of multiple factors. While some corporates have commenced new investments, many are finding the need for additional working capital because of the sharp increase in commodity prices. “There is also a shift in borrowing from bond markets to banks,” said Jebaraj. Many corporates are also likely to refinance maturing foreign currency borrowing with rupee loans.
Despite the increase in interest rates and commodity prices, Jebaraj does not see any stress on borrowers as many had got their act together during the pandemic by reducing borrowing. The bank is also cautious and extends loans to only better-rated borrowers.
“Unlike the repo-linked rates, the MCLR goes up when the incremental cost of deposits go up. Corporates with term loans linked to the repo rate are now looking at switching to the MCLR,” said IDBI Bank deputy managing director Samuel Jebaraj.
Since May 2022, the RBI has hiked the repo rate by 140bps and is likely to increase them by another 50bps this week. Compared to repo rates, deposit rates have only increased marginally. “Around 55% of our deposits are current, and savings account where the cost of funds has not gone up. Even within term deposits, the share of costlier bulk deposits is 10%,” said Jebaraj. As a result, the bank’s cost of funds is only 3.6%.
Jebaraj said that because of this headroom, the lender is able to grow its corporate loan book by 18% without pressure on funds. “We will continue to maintain the ratio of retail and wholesale at 60:40 as a prudent measure. Unlike corporates, retail loans do not have business cycles and from a balance sheet risk point of view, it is better to have more granular risks,” he said.
According to Jebaraj, the demand for corporate credit is rising because of multiple factors. While some corporates have commenced new investments, many are finding the need for additional working capital because of the sharp increase in commodity prices. “There is also a shift in borrowing from bond markets to banks,” said Jebaraj. Many corporates are also likely to refinance maturing foreign currency borrowing with rupee loans.
Despite the increase in interest rates and commodity prices, Jebaraj does not see any stress on borrowers as many had got their act together during the pandemic by reducing borrowing. The bank is also cautious and extends loans to only better-rated borrowers.