Chief executive Rajneesh Karnatak said in an interview withMint that the bank is looking for companies rated ‘BBB’ or ‘A’ to lend to, as those rated ‘AA’ or above have more bargaining power on lending rates.
Credit ratings offer insights into a borrower’s financial strength, with a high rating signifying a lower possibility of default than low-rated counterparts. Banks charge a spread on top of the benchmark lending rate to arrive at a final rate, and better-rated companies or those with more wherewithal are able to extract a finer pricing.
Intense competition among banks to onboard top-rated companies also play a role in determining lending rates.
“So, as far as the corporate lending is concerned, let me be very frank that there is huge competition among the banks,” said Karnatak, seated at the bank’s headquarters in Mumbai’s Bandra Kurla Complex commercial hub. “What is happening is the ‘AAA’ and ‘AA’ rated corporates are coming to the market at a very fine price. So we have to be very selective, otherwise our margins will be hit.”
A majority of Bank of India’s local corporate loans of ₹50 crore and above—88.7% as on 31 December—were rated ‘A’ and above, slightly down from 89.8% in September.
Bank of India’s global net interest margin (NIM) declined to 2.9% in the first nine months of 2024-25 (April-December 2024) from 2.98% in FY24. To add to this, the Reserve Bank of India’s 25 basis point (bps) rate cut to 6.25% in February is also expected to hit the margins of the banking industry.
Fitch estimates the net interest margins of Indian banks will fall by about 10 basis points on average in the financial year ending March 2026, because of RBI’s February rate cut—the first in about five years—and an additional 25 basis point cut that the credit rating agency expects in FY26.
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How lending rates are determined
According to Karnatak, several top-rated companies want lending rates to be based on external benchmarks such as the repo rate or treasury bills (T-bills) instead of its Marginal Cost of Funds based Lending Rate, which banks use to price loans to large companies.
While RBI has mandated the use of external benchmarks like the repo rate and T-bills to price loans to retail and small business borrowers, corporate loans are primarily linked to MCLR. However, banks can lend to corporate borrowers based on external benchmarks as well.
As on 31 December, 48.3% of Bank of India’s domestic loans were based on external benchmarks, and 29.1% on MCLR, per Bank of India’s investor presentation.
“One-year MCLR today is 9.05% and when a corporate comes to me for a repo rate and not MCLR loan, it means that they are looking for a rate below 8%. So we are very selective,” said Karnatak.
Bank of India, he said, is trying to find good ‘BBB’ and ‘A’-rated companies to which it can lend at MCLR.
“… We feel that the ‘BBB’ and ‘A’-rated customers give better rates of interest and better commissions and charges to us,” Karnatak said. “I will not obviously make my exposure zero to the top 10 corporates of the country or the top 10 public sector enterprises. I will continue to lend to them but will not go overboard.”
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A limited universe of top-tier borrowers
To be sure, there are few companies that are rated ‘AAA’ and ‘AA’ and banks anyway have to look at lower-rated firms to grow their businesses, according to an analyst at a rating agency.
The analyst, who did not want to be identified, said only about 1% of the rated universe of companies are rated ‘AAA’ and another 2% are rated ‘AA’, and banks would have access to a limited pool of borrowers if they restricted themselves to such borrowers.
“On top of that, the ones on the top of the ratings table do not require too many loans and are usually backed by stronger cash flows,” he said, adding that some banks already have quite a bit of exposure to companies rated ‘A’ and below.
At India’s largest lender, State Bank of India, ‘BBB’ and ‘A’ borrowers accounted for 24% of corporate loans as on 31 December, as against 22% in the same period the previous year.
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Besides, lenders in India are yet to see a clear uptick in corporate loan demand, with retail loans ruling the roost. However, there has been some pickup of late.
While retail loans by banks grew 12% year-on-year in January, loans to industries were up 8%, RBI data show. Bank of India has not bucked this trend. Its retail loans grew 21.2% on-year in December, while loans to ‘corporate and others’ grew 10.1%.
“They (large companies) have a lot of their own internal accruals and they are not drawing their working capital limits,” said Karnatak. “A big shift is that they are approaching the equity markets and are issuing bonds, and therefore they do not have to come to the bank to raise resources.”
According to rating agency Icra, corporate bond issuances picked up momentum in the December quarter, rising to ₹3.5 trillion from ₹3 trillion in the second quarter and ₹1.8 trillion in the April-June period. Icra has raised its estimate for bond issuances in FY25 to ₹10.8-11.1 trillion from its earlier estimate of ₹10.4-10.7 trillion.
