CEO Rajneesh Karnatak said in an interviewMint Banks are looking for companies rated “BBB” or “A” to borrow because those rated “AA” or higher have more bargaining power on loan interest rates.
Credit ratings provide insights into the borrower’s financial strength, with a high rating indicating a lower probability of default than a low rating. Banks charge a certain spread on the benchmark loan interest rate to reach the final rate, while companies with higher ratings or more companies can withdraw more favorable prices.
Fierce competition among banks for the highest and highest companies also played a role in determining loan interest rates.
“So, in terms of corporate loans, let me be very frank about the huge competition between banks,” Karnatak said. “What’s going on is that the ‘AAA’ and ‘AA’ grade companies are listed at very high prices, so we have to be very selective or our profit margins will be hit.”
Most local corporate loans for Indian banks ₹As of December 31, 500 million and above were priced at “A” and above, slightly higher than 89.8% in September.
Bank of India’s global net interest margin (NIM) fell to 2.9% in the first nine months of 2024-25 (April to December 2024) from 2.98% in FY24. To this end, the Reserve Bank of India’s 25 basis points (BPS) rate will also drop to 6.25% in February, which is expected to reach banking profit margins.
Fitch estimates that the average net interest margin for banks in India will drop by about 10 basis points for the fiscal year ended March 2026, as the Reserve Bank of India’s February fell by five years (the first in about five years) and the 25 basis points expected by credit rating agencies in fiscal 26.
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How to determine loan interest rates
According to Karnatak, several senior companies want loan rates to be based on external benchmarks, such as repurchase rates or T-Bills, rather than the marginal cost of loan rates based on funds-based loan rates, which banks use for large companies’ price loans.
While the RBI has forced external benchmarks such as repurchase rates and T-bills to use them for price loans for retail and small business borrowers, corporate loans are primarily related to MCLR. However, banks can also provide loans to corporate borrowers based on external benchmarks.
As of December 31, 48.3% of Indian banks’ domestic loans were based on external benchmarks, while the MCLR was 29.1%.
“Today’s MCLR is 9.05%, and when companies come to me with a repo rate instead of an MCLR loan, it means they’re looking for tax rates below 8%.”
He said Indian banks are trying to find good “BBB” and “A” rating companies that can lend to MCLR.
“…We think that the ‘BBB’ and ‘A’Red customers give us better rates, better commissions and fees,” Karnatak said. “Obviously, I’m not going to zero my exposure, i.e. the top 10 companies in the country or the top 10 public sector businesses.
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Limited top borrower universe
To be sure, according to an analyst at the rating agency, few companies are rated “AAA” and “AA”, and banks have to research lower rating companies anyway to grow their business.
Analysts who do not want to be identified say only about 1% of the company’s universe is rated “AAA” and another 2% are rated “AA”, and if banks limit themselves to such borrowers, they will have limited access to limited borrowers.
“The most important thing is that the top of the rating sheet does not require much loan and is usually backed up with stronger cash flow,” he said.
India’s largest lender, the “BBB” and “A” borrowers, accounted for 24% of the company’s loans as of December 31, compared with 22% in the same period last year.
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Furthermore, India’s lenders have not seen a significant increase in corporate loan demand, with retail loans dominating the habitat. However, there have been some pickups recently.
While retail loans from banks rose 12% year-on-year, loans to the industry increased by 8%. Banks in India do not limit this trend. Its retail loans grew 21.2% in the December year, while “company and others” loans rose 10.1%.
“They (large companies) have a lot of their own internal accruals and there are no limits on working capital,” Karnatak said. “A big shift is that they are approaching the stock market and issuing bonds, so they don’t have to come to the bank to raise resources.”
Corporate bond issuance gained momentum in the December quarter, rising to ₹3.5 trillion ₹3 trillion in the second quarter ₹$1.8 trillion from April to June. ICRA has raised its estimates for the issuance of bonds in FY25 to ₹Estimates from 10.8-11.1 trillion ₹10.4-10.7 trillion.
