India’s top four banks, namely State Bank of India, HDFC Bank, Bank of Baroda, and Axis Bank, could account for nearly 60 per cent of fresh lending to India Inc. They could be handing out loans to large corporates at rates extremely competitive that the rest of the industry finds it untenable to match them.

According to sources, the price war that began in the corporate lending space back in September 2021 is barely showing signs of abatement.

“With the hike in repo rates since May 2022, lending rates to large corporates have moved in tandem, and to some extent, we don’t have the crazy pricing war we saw till September 2022. But even at the current rates, there is stiff competition in the market, concentrated among a few players,” said a senior executive of a foreign bank.

Top-rated corporates or AAA-rated entities continue to access bank lending at just a marginal premium to government security (G-Sec) rates.

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For instance, in the case of government-owned entities, bank facilities are available at rates starting at 7.5–7.75 per cent, while large conglomerates with AAA ratings can borrow at 8–8.5 per cent. For those with an A and above rating, the rates inch up to 8.5–8.75 per cent. However, with a bit of negotiation, even the large corporates land at 7.65–7.95 per cent pricing. Interestingly, the gap between interest rates for AAA and A-rated corporations, which was over 75 basis points until a year ago, has also shrunk now. 10-year G-Sec rates hover in the 7.07–7.15 per cent range.

“Such cut-throat pricing has ensured that some of the mid-sized banks, whether public or private, find it untenable to bid for these large contracts,” said the CEO of a private bank. His view is in sync with the commentary that most bank chiefs presented in the June quarter results.

Pricing dynamics

A lot of reliance is being placed on the credit ratings of the corporate entities. The underlying assumption is that entities rated A and above have slim chances of defaulting, given the strength of their individual balance sheets and their overall economic health. Secondly, when a bank is bidding for loan exposure, they are also vying for other business, such as transaction banking, current accounts, and salary accounts of employees within the corporate house.

“Even if the pricing is low, it gets compensated by other businesses, and therefore the net return on the loan portfolio looks good,” said a banker quoted above.