The heightened pricing war in the corporate or wholesale lending market is beginning to pinch banks more than what was anticipated. According to senior executives in the industry, NIM or net interest margin, which is the measure of profitability, is at a all-time low of 1.5-1.75 per cent for the wholesale banking business. This converts to a profitability erosion of over 100-120 basis points over the last five years.
To be sure, despite the 250 basis points increase in the repo rate since May 2022 (now at 6.5 per cent), well-rated corporates, those with credit rating of A and above, continue to access bank loans at the near about the benchmark rates. businessline had reported earlier that entities with AAA rating continue to access bank loans at 7.25 - 7.75 per cent, while those with A and above rating access debt at 7.5 - 8.75 per cent.
Prior to last year’s repo rate hikes, lending rates to top rated corporates dipped to as low as 4.75 - 5.25 per cent.
“Initially banks were able to handle such low rates without compromising much on profitability because the benign asset quality trends and the near tapering of ageing related provisioning supported pricing. However, since early 2023 it’s become a tricky situation and now it’s pinching banks hard on profitability,” said a senior banker who didn’t want to be named.
In fact as against the trend prior to 2018, when corporate loans were making up for retail business NIMs, now the tables have reversed. Bankers say that retail loans are literally feeding the overall profitability of banks, at times even that of corporate loans.
No near-term respite
What compounds the issue is that bankers say the trend of weak corporate banking profitability is unlikely to reverse any soon. “We are not finding homogeneous demand in corporate loans; it’s largely replacement capex and loans availed for improvement of existing operational infrastructure. As long as fresh capex doesn’t revive, the situation will persist,” said a CEO of a public sector bank.
Apparently bankers say that it’s difficult to stay away from the competition as well. “We would lose our presence and miss out on good deals if we choose to stay away from the market because of the price war. But the dilemma is how do you maintain the balance and still operate in such a market,” said another senior banker heading the corporate banking arm at a private bank.
To mitigate the pressure on profitability, banks have increased their focused on non-lending corporate business, such as broad basing the transaction business, increasing non-fund based lending activities such as letter of credit and bill discounting, and increasing focus in offering a bouquet of corporate account services namely salary accounts of employees, credit cards and insurance products.