Smaller PSBs take to undercutting in project finance market

Small and mid-sized public sector banks (PSBs) have turned aggressive in the project finance market, undercutting their larger peers in order to raise their exposures to better-rated corporates.

Bankers FE spoke to said that there is intense competition in the market among lenders to participate in syndication of road and other infrastructure projects being executed by public sector units (PSUs) and highly-rated private sector players. Even after the two repo rate hikes in May and June, players like NTPC were able to snap up funding at 6.5%, just 160 basis points (bps) above the repo, according to banking sources. This was before Friday’s hike in the repo rate of 50 bps.

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What’s more, there are multiple instances of a small PSB edging past one of the largest private banks to be part of a marquee syndication deal. “Small PSBs are quite aggressive now and one has actually cut MCLRs (marginal cost of funds-based lending rate) to become more competitive,” said an executive with a mid-sized private bank. However, large players like State Bank of India (SBI) and Bank of Baroda (BoB) have stayed conservative with pricing, unwilling to price money below 7.2-7.25%, he added.

While the back-to-back rate hikes have pushed loan rates higher, project financing is still available at around 6.7%, bankers said.

Prashant Kumar, MD & CEO, Yes Bank, said that apart from the five largest banks – state-owned and private lenders – other PSBs have of late turned aggressive in funding well-rated corporates. “There is a huge competition. Banks which are sitting on large deposits, where the CD (credit-deposit) ratio is low, are in a better position to offer competitive rates, as compared to banks where liquidity is always at a higher cost,” he said. Yes Bank would prefer to protect and improve its margins at this stage, he added.

Interestingly, quite a few PSBs – SBI, BoB and Canara Bank among them – have reported a sequential fall in their net interest margins (NIMs) in Q1 FY23. Most of them have attributed the dip to a staggered transmission of the repo rate hikes through their loan books.

SBI chairman Dinesh Khara said the bank is now relatively comfortable with the current trends in risk pricing. “Mispricing of risk has come down, but perhaps till such time people are saddled with some excess liquidity in their balance sheets, they might resort to this (mispricing). As far as we are concerned, we are very mindful in terms of maintaining our NIMs and we are ensuring there should be no mispricing of risk as far as we as a bank are concerned,” he said.

Outstanding bank credit to large industries grew 3.3% year-on-year (yoy) in June 2022 to `24 trillion, as against a contraction of 4.8% witnessed in June 2021.


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