54 Of SBI’s Largest Borrowers Face Higher Borrowing Costs
Number of ‘large borrowers’ impacted by RBI curbs will likely be less than 100
As many as 54 of the largest borrowers of State Bank of India (SBI) may face higher borrowing costs when the Reserve Bank of India’s (RBI) new norms on large corporate borrowers kick in next fiscal, said a senior official at the country’s largest lender.
The bank can restrict lending to these companies but the question is whether there is enough depth in the bond market to support the shift in borrowings, the official said on the condition of anonymity.
The norms will also put pressure on promoters to bring in more equity, which in the current context looks difficult, the official added.
On August 25, the RBI issued rules intended to move large corporate borrowers away from banks and towards the bond markets. Under the new rules, certain borrowers will be classified as “specified borrowers”. A specified borrower will be one who has more than Rs 25,000 crore in bank loans at the end of 2016-17. The threshold will fall to Rs 15,000 crore in 2018-19 and Rs 10,000 crore starting fiscal 2020.
According to two large credit rating agencies, between 55-60 companies had outstanding bank borrowings of more than Rs 10,000 crore as on March 31, 2015. However, since the RBI is looking at the sanctioned credit limit and not just the loans that have been drawn down, the number of firms impacted by the new rules could be closer to 80.
Once these borrowers are identified, 50 percent of their new borrowings can go through the banking sector as usual.
The remaining 50% should ideally shift to the bond markets. If these companies continue to borrow from banks, the lenders will need to set aside an additional 3 percent provision and also assign a higher risk weight to this borrowing. Industry estimates suggest that the cost impact of continuing to borrow from the banking sector would be about 150 basis points above the lending rate.
“As per Ind-Ra’s estimate about 20 percent of bank credit would be to entities having aggregate fund based limits above Rs 10,000 crore at present including 5-6 percent towards deeply stressed corporates,” said India Ratings & Research in a note in May, when the draft guidelines were first released.
“If implemented effectively, this framework has the potential to address the significant concentration risk being posed by stressed corporates that currently account for 40 percent of the banking system’s net worth over the medium term,” the rating agency added.
De-Risking the Banking Sector
The measures announced by the RBI are seen as a way to de-risk the banking sector which is weighed down by bad loans, generated mostly by large corporate borrowers.
According to the December 2015 edition of the RBI’s financial stability report,
the gross non-performing assets ratio of large borrowers among state owned banks jumped from 6.1 percent in March 2015 to 8.1 percent in September 2015.
More recent figures for this specific category of borrowers are not available. Across the banking sector, gross bad loans for 39 listed banks rose to Rs 6,30,000 crore at the end of the June quarter, up 96.46 percent from Rs 3,21,000 crore in the year ago quarter.
IDFC Bank and RBL Bank are not included in this compilation since comparative figures from a year ago are not available.
Since a bulk of the bad loans emerged from a small subset of borrowers, the RBI has been keen to restrict the concentration risk of the banking sector to these firms. However, RBI wishes to do this in a manner that doesn’t hit an already weak private investment cycle.
“While concerns emanating from the significant concentration of large exposures in banks’ books are justified in the current milieu, the challenge is to shift a part of the resource allocations to bond financing without impacting aggregate allocative efficiency and economic welfare,” said the RBI in the June edition of its financial stability report.
Can the Corporate Bond Market Support the Shift?
The big question, according to bankers and analysts, is whether there will be enough buyers for an expanded supply of corporate bonds. The corporate bond market has been notoriously illiquid even though it has developed in recent years.
One reason for this is that institutional investors like insurance companies face restrictions on the credit quality of the paper that they invest in.
For instance, the Insurance Regulatory Development Authority (IRDA) stipulates that insurance companies have to invest atleast 30 percent of the corpus of unit-linked schemes in government bonds; atleast 5 percent in housing and infrastructure bonds rated “AA” or above. Only 25 percent of the investible corpus can go into other investments and not more than 5 percent can be invested in paper rated “A” or below.
To be sure, the RBI’s decision to allow banks to offer partial credit enhancement of upto 50 percent of the bond issue size will help lower-rated borrowers come to the markets.
A partial credit enhancement is an underwriting by a bank, which improves the credit rating of the corporate bond being issued. Earlier banks were allowed to provide a partial credit enhancement of up to 20 percent.
“With partial credit enhancement you will have lower credit quality infrastructure projects tap the markets,” said Somasekhar Vemuri, senior director at CRISIL Ratings.
“Along with that, easier investment norms from the insurance and pension regulators, if they come, will also be helpful in deepening the corporate bond market,” Vemuri added.