Corporate borrowing costs see greater fall than home loans: RBI

With banks turning stingy in passing on RBI's rate cuts to consumers, rate of home loans has fallen by only 0.26 percentage point since 2015, but corporates have managed to bring down their borrowing cost by 1.44 percentage point by tapping bond markets, as per the central bank.

With banks turning stingy in passing on RBI's rate cuts to consumers, rate of home loans has fallen by only 0.26 percentage point since 2015, but corporates have managed to bring down their borrowing cost by 1.44 percentage point by tapping bond markets, as per the central bank. Between January 15, 2015 and April 5, 2016, Reserve Bank reduced the repo rate by 150 basis points, but in response to this, the banks have lowered their benchmark lending rates by only 60 basis points, according to Reserve Bank's annual report for 2015-16.

Between December 2014 and June 2016, home loans dropped by just 0.26 per cent to 10.76 per cent in June 2016 from 10.50 per cent in December 2014.

During the same period, corporates' borrowing became cheaper by 144 basis points.

Corporates' borrowing from shortest maturity commercial papers dipped to 6.54 per cent in June 2016 from 7.98 per cent during December 2014.

Corporates are borrowing at a cheaper rate through issuance of commercial papers, RBI said, while adding that there was a surge in public issuances of corporate bonds in the fiscal year 2015-16.

In the second half of the year, following the September reduction in the policy repo rate and again towards the close of the year, yields of top-rated AAA corporate bonds eased, following g-secs (government securities) yields.

The corporate bond yields also declined following easing of g-secs yields during 2016-17 so far (up to August 2016).

"Taking advantage of low yields vis-a-vis bank lending rates, corporates raised more resources from the bond market in recent period," RBI stated.

According to RBI, banks are not passing on the benefits of rate cuts to customers to protect their earnings.

So far in the financial year 2016-17, there has hardly been any transmission of a reduction in the policy rate to the actual lending rates charged to customers, stated the report.

RBI said banks might have been loading a higher credit risk premia on their new customers in order to attain their desired return on net worth in a rising NPA environment.

Lenders are also charging a higher strategic risk premia on their riskier loans as part of their business strategy to reorient their lending operations towards less risky activities, it said.

NPA sales down to a trickle of just 2% of total bad loans

Notwithstanding rising bad loan problems in the system, sale of stressed assets to asset reconstruction companies (ARCs) in 2015-16 was only a trickle of the NPA mount at 2 per cent of the total of nearly Rs 5.8 trillion, which is down a whopping 20 per cent from previous year, says a report.

Notwithstanding rising bad loan problems in the system, sale of stressed assets to asset reconstruction companies (ARCs) in 2015-16 was only a trickle of the NPA mount at 2 per cent of the total of nearly Rs 5.8 trillion, which is down a whopping 20 per cent from previous year, says a report.

“The overall loans sold in FY2016 were lower by 20 per cent y-o-y and around 15 per cent of the overall loans in the banking system,” Kotak Institutional Equities said today in a report that is based on the analysis of 33 public and private banks.

The report did not offer any reasons for the massive dip in the sales, but it can be noted that banks are not happy with the cheap valuation that ARCs are offering while these companies are capital starved to make the higher upfront payments to the banks. The report also did not quantify the total amount of bad loans sold to ARCs.

As per RBI, total NPAS in the system jumped to 7.6 per cent in 2015-16, up from 4.6 per cent in the previous fiscal, which it warned could jump to a whopping 8.5 per cent by this fiscal end. The total stressed assets including NPAs stood at a staggering 13 per cent or over Rs 8 trillion in 2015-16.

State-run banks sold 75 per cent of their overall bad loans, lower than the 90 per cent of loans sold in 2014-15.

Axis Bank sold the largest quantity of loans but at a significant loss. The SBI Group, however, had the largest share of loans sold at 33 per cent of the overall loans compared to over 60 per cent in 2014-15.

Allahabad Bank and Central Bank were the two large public sector banks which sold a high share of their loans to ARCs last year.