Sovereign loans. Private banks slug it out for PSU business with ultra low rates 

It’s a pitch battle among private lenders with leading names such as HDFC Bank, Kotak Mahindra Bank and IndusInd Bank vying for the cream of the corporate loans. Term loans of government companies with sovereign or quasi-sovereign rating are being poached like hot cakes by private banks at interest rates as low as 4.5 per cent, that is at just half per cent spread over the current repo rate of four per cent. The aggressive rush for these high-quality loans is owing to the Reserve Bank of India’s August 2020 circular on ‘Opening of Current Accounts by Banks - Need for Discipline’ which mandated banks to have a minimum 10 per cent exposure to term loans of a borrower to handle the borrower’s current account. 

This diktat temporarily resulted in some of the private banks losing out on current account deposits. To regain their ground, some banks are rushing to lend to government companies at rates never seen before. “Leading public sector banks (PSBs) are unwilling to underwrite these loans at such low rates as they believe the business will not be viable in the long run,” said a banker aware of the matter. PSBs are staying away from the price wars. “They are comfortable with an interest rate of 5.5 – 6 per cent interest rate but not lower. Therefore, when a borrower comes with a counteroffer from a private bank, PSBs are okay to let go of such accounts,” added the person quoted above. 

Also, with private banks still reluctant to increase their exposure to non-government companies and those with rating of A or lower, much of the long-term credit demand of these companies are met by public sector banks. These loans allow for better pricing of risk and hence PSBs are more forthcoming towards such borrowers, rather than enter a price war with private banks to retain top-quality government accounts. 

Meanwhile, private banks are relying heavily on the cash management business that the government companies are expected to bring in. Last year, the RBI eased the embargo on government business opening the gate for a larger participation from private banks. It is expected that the large government companies in addition to ringing in the interest income will also park their funds in current accounts which will help generate banks the float income. “G-secs trade at over 6.8 per cent and this should amply augment the interest income from these sovereign and quasi-sovereign loans,” said a senior official of private bank. In other words, lower profitability from these loans is set to be compensated by higher treasury gains.   

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With competition heating up in the retail business, poaching high-rated corporate accounts for a dearth low interest rate is seen as a safer way of growing the balance sheet, though not very margin accretive in the near-term. 

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