In the pandemic year, credit markets are sharply tilted towards top-rated big companies while smaller borrowers continue to struggle for funds despite ample liquidity floating around in the financial system. High risk aversion on the part of banks is hurting smaller borrowers.
The Reserve Bank of India (RBI) has announced massive liquidity measures worth Rs 12.7 lakh crore since February this year. But data suggests that this money has not benefited smaller firms. Bigger borrowers, who were anyway getting money, got even cheaper funds. These firms used this money to refinance costlier debt in most cases.
According to treasury dealers, big corporates are getting cheaper money from the debt market; some even below 3.35 percent (at which banks park money with the RBI). Mutual funds are rushing to lend to AAA companies at throwaway rates, dealers said.
“It is almost like free money,” said a dealer who didn’t want to be named. “No one is particular about the rate. MFs want only top-rated papers,” said the dealer.
On Wednesday, L&T Finance raised Rs 2,000 crore at 3.25 percent and L&T Finance Holdings raised Rs 1,000 crore at 3.41 percent issuing a three-month paper.
Similarly, Chennai Petroleum Corporation raised Rs 500 crore at 3.18 percent issuing a three-month paper, Reliance Industries raised Rs 5,000 crore at Rs3.18 percent issuing a three-month paper and LIC Housing Finance raised Rs 10,000 crore issuing a one-year paper at 4 percent. All these are top-rated companies.
According to rating agency CARE, fund raising from the corporate debt markets was lower on a monthly basis and continued to be restricted to the higher credit-rated entities. Commercial paper (CP) issuances have picked up significantly since March but largely by big companies. Since August, around Rs 1.2 lakh crore worth CPs were issued each month by companies.
Top-rated firms dominate
In November 2020, nearly 93 percent of the issuances carried a rating of AA- and above out of which 70 percent of the issuances had a rating of AAA followed by AA (8 percent), AA+ (13 pecent) and AA- (2 percent). Nearly 4 percent of the issuances had A rating during the month.
Out of the total debt issuances raised during November 2020, 52 percent of the issuances had a maturity period of greater than or equal to 10 years, 24 percent of the issuances had tenure of 5-10 years while 15 percent of the issuances had maturity less than 3 years, CARE said.
At the same time, smaller companies are hard bargaining with banks for loans. These firms don’t find takers in the debt market. Even if they get a bank loan, the money comes with a higher cost. “Banks are risk aversive. I don’t blame them. Moratorium and subsequent restructuring have created a smokescreen over the NPAs,” said another dealer.
Commercial banks are lending to smaller, low-rated firms at 12-14 percent while big companies with a higher rating can get at around 9-10 percent. But, top-rated companies prefer to tap debt market than bank loans. “Take the case of smaller microlenders. They continue to struggle for bank loans. Even if a bank agrees, the rate quoted is too high,” said P Satish, who heads Sa-Dhan, a body of microlending entrepreneurs.
The RBI’s credit growth data shows how bank money has become scarce for smaller borrowers. Loan growth to micro and small companies contracted 5.3 percent in this financial year compared with a contraction of 4.4 percent in the previous year.
“Banks do not want to take exposure to smaller companies fearing defaults,” said a senior banker who refused to be identified.
Government push helps
The MSME (micro, small and medium enterprises) loan scheme announced by the government in the wake of the pandemic has helped, to an extent, to keep the credit flow to medium-sized companies.
This has reflected in the credit growth figures. Banks showed willingness to lend because of the pressure from the government to participate in the scheme and, secondly, due to fact that these loans were government guaranteed.
Loan growth to medium-sized companies grew by 16.7 percent till October this year as against a contraction of 0.8 percent in the corresponding period in the previous year. Banks have sanctioned Rs 2 lakh crore to 81 lakh MSMEs under the credit guarantee scheme.
But, according to bankers, companies have used a good part of the money received under the scheme to repay the older loans, instead of investing in productive assets.
The moratorium and one-time restructuring (OTR) have helped banks mask bad loans that would have been reported in the wake of COVID. Similarly, the relaxation on NPA recognition rules following a Supreme Court interim order too has helped but all these will contribute to a lack of clarity on the asset quality scenario.
Loans to individuals shrink
Retail loans are considered to be much safer by banks even during an economic downturn. But in the pandemic year, banks have cut down credit to retail customers as well. According to RBI data, personal loans have grown just 2.3 percent this fiscal so far till October as against a growth of 7.6 percent in the year-ago period.
Within personal loans, even growth in housing loans has slowed down to 2.6 percent in the fiscal year so far compared with 9.4 percent in the year-ago period while growth in vehicle loans slowed to 1.5 percent compared with 2.3 percent.
To be sure, credit markets have always favoured big companies with high ratings all along even before COVID-19. But, the divergence has become more visible in the pandemic year despite the availability of sufficient liquidity in the system.
In fact, risk-averse banks are parking money in the central bank’s reverse repo window rather than using it to lend, partly due to poor demand. Banks parked Rs 6 lakh crore in the reverse repo window on Tuesday at 3.35 percent.
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