Despite 135-bp rate cut by RBI in 2019, bonds cheaper than bank loans for India Inc

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The Reserve Bank of India (RBI) in calendar year 2019 reduced the policy rates by 135 basis points, which was a signal for scheduled commercial banks to follow suit. (Representational Image)

It’s cheaper for corporates to tap the bond market than go in for bank loans. The bond market is providing better rates of borrowing relative to banks for companies with higher ratings, as per a Care Ratings research report.

The Reserve Bank of India (RBI) in calendar year 2019 reduced the policy rates by 135 basis points, which was a signal for scheduled commercial banks to follow suit. However, the average marginal cost of lending rate (MCLR) of banks has come down by only 64 bps from January 2019 to December 2019. On the other hand, during this period the risk free rate (average government bond yields) have reduced by 81 bps, while the corporate bond yields of the safest risk category (AAA rating) has fallen by almost one per cent, or 100 bps.

“The cost of borrowings is one of the critical factors considered in the evaluation of an investment project and borrowers prefer to raise funds from the source where this cost is the lowest,” says the report. Industry’s loan outstandings declined by 3.9 per cent to Rs 27,72,248 crore during the period April-November period of 2019, according to RBI data.

“The corporate bond yields have been lower than the one-year average MCLR mostly in the AAA category and in the AA+ in a few instances. In September 2019, the yields had been lower even in case of AA and AA- categories. “While comparing the corporate bond yields with the average base rate, it can be seen the corporates in AAA, AA+, AA category have been benefitting for most months (except September 2018 and October 2018) as the yields have been lower than the base rate,” it said.