SBI picks up bonds to retain high-rated corporate customers

Mumbai: In a bid to retain the cream of its corporate customers, India’s largest lender State Bank of India (SBI) is buying into their bond issuances. In the April-June quarter, SBI moved Rs.25,000 crore worth of exposure to high-rated corporates from its loan book to its investment book.

“A bond issuance is always a cheaper source of funding than a loan for a company. If our customers want to convert their loans to a bond exposure, then it makes sense to fund it since the customer will remain within our stable,” said a senior official at SBI, on the condition of anonymity as he is not permitted to be quoted in the press.

Corporate loan growth has seen a steady decline at domestic banks due to muted demand conditions. The companies that eventually do end up borrowing tap the corporate bond market to fund their requirements as it is a much cheaper source of funding.

A corporate rate AA+ or above tends to get funding at a pretty good rate. Depending on the tenure of the bond, the rates could be as low as 7.9-8.5%, the SBI official said. This is at least 100-110 basis points (bps) cheaper than the loan rate that these customers would get.

One bps is one-hundredth of a percentage point.

SBI’s large corporate loan book was as high as Rs.3.08 trillion as on 30 June, as compared with Rs.2.56 trillion a year ago.

While this means that the bank will lose out margins in these companies, the bank is willing to take the hit if this means that the company will continue to borrow from it in the future, the official quoted above said.

While announcing SBI’s first quarter results, chairman Arundhati Bhattacharya said that the bank had reduced its overall loan book by about Rs.50,000 crore, of which nearly half had moved to its investment book in the form of bonds.

However, other lenders are not buying the banking sector behemoth’s logic.

“The Indian corporate bond market is largely limited to AAA or AA+ rated companies. There are many bankable companies which might be rated slightly lower, but do not get any funding through bond. In such cases, the loan market can come handy and there are plenty of opportunities to grow your book there,” said the chief financial officer of a mid-sized private sector lender, on conditions of anonymity.

According to a senior official at the Bank of Baroda, who did not want to be named, the lender is already contemplating whether it needs to continue with certain unprofitable business relationships that it developed over the years. During the April-June period, the bank has consciously ended such arrangements and tried to pursue cases where it can have a deeper business proposition with the customer that goes beyond just credit.

“We associate with the customers in the way they feel they need funding. While we would prefer sticking with the loan market, in some very select cases we may even pick up a bond exposure. But yes, that would be a very small part of the overall relationship,” said a senior official at Axis Bank, on the condition of anonymity.