Banks form beeline to sign up short-term loans

KOCHI: Large corporates are now increasingly preferring short term loans (STLs) due to the uncertainty in the ‘interest market’ even as the key lending rate benchmark, repo, has stayed unchanged at 6.5 per cent for about 18 months, right from February 2023 onwards.

Talking to businessbenchmark.news, a top official of a Kerala-based bank said banks are literally forming a beeline for short term loans (STLs) from large PSU corporates like ONGC, BPCL, Indian Oil Corporation (IOC), etc, as well as large listed non-PSU companies like Reliance, ITC and Tata group companies.

Buyer’s market

Corporate borrowers want to bide time until a clear picture emerges on the direction of interest rates after which they can sign up long term loans.

As of now, the banks are scrambling for deposits, which come at a cost, and this has been essentially pushing up their lending rates too. Even lenders too are, to an extent, comfortable with disbursing short term loans (STLs) as they too are redefining thier strategies.

In fact, STLs have become a buyer’s market now due to the high demand for these types of loans from lenders.

Highly rated companies

“These borrowers are top-notch companies with the highest possible ratings from leading agencies, and moreover, these loans benefit from quick disbursal due to their short-term nature and absence of lengthy approval processes,” credit head of a bank said.

According to corporate banking sources, STLs carry an interest rate below 7.5 per cent and are given for tenures of 45 days to 90 days.

Interestingly, here the lenders are shortlisted by the corporate borrowers generally through a bidding process, wherein the banks could offer their quotes for STLs.

Runaway growth in deposits

The runaway growth in lending compared with a relatively slow growth in deposits has landed the banks in a precarious position, forcing them to attract deposits at any cost, pushing the rates up.

The RBI Governor, Shaktikanta Das, who has repeatedly red-flagged the widening gap between deposit and loan growth, has directed the banks to seek innovative methods to build their deposit books.

STLs offer the corporate an opportunity to avoid locking in long term loans, when the market itself is uncertain about the direction of interest rates in the coming months.

It’s more than repo

It’s not the repo alone that determines an interest rate of a loan. Though the loan rates are supposed to move along with the repo rates as far as the loans linked to repo as the benchmark are concerned, the banks are free to fix the margin above the repo rate.

And hence repo alone doesn’t define ultimate lending rates. Moreover, repo doesn’t have any control over deposit rates.

It should also be understood that loans are priced on marginal cost of lending rate (MCLR) too.

It’s well known that banks have been increasing deposit rates in the past one year with the rates having increased by 100 to 150 basis points (1 percentage point to 1.5 percentage point).

SBI rates up again

State Bank of India (SBI), the largest state-run lender, has increased its MCLR by 10 basis points (bps) across all tenors, effective August 15.

This marks the third consecutive month of MCLR hikes by SBI. With the new hike, the three-year-tenure MCLR now stands at 9.1 per cent. The other PSU banks that raised their MCLR recently include Bank of Baroda (BoB), Canara Bank and UCO Bank.

High CD rates

Bank will have to keep hunting for deposits without bothering about the rates. Most banks are sitting on a high credit-deposit ratio (CD ratio) that’s above 80 per cent, and in the case of HDFC Bank, it’s more than 100 per cent.

RBI is said to have sounded to selected banks to rein in their high CD ratio by bringing in more deposits or cutting down on loans.

 It’s also heard from the banking circles that RBI might come out with clear-cut directions on the credit-deposit ratio (CD ratio).