- Say no appetite for fixed-rate, long-term corporate loans not knowing how interest rate cycle horizon will unfold
- Global interest rates recently shown signs of moving towards tightening cycle amidst inflationary concerns
- Banks’ willingness to lend to corporates expected to slow down in second quarter
- Expect marginal increase in customers seeking moratorium on loans under recently announced debt relief round
By Nishel Fernando
Appetite of local banks to facilitate the corporate sector with new loan facilities to reprice their existing debt stocks to long-term fixed-rated loans under the current low-interest rate regime is waning amid concerns over interest rate risks and tightening net interest margins.
In the first quarter of the year, credit demand by corporates accelerated at the highest pace compared to SME and retail segments.
“Corporate segment wasn’t too much of a concern for us. Some transactions in the segment were basically the hardcore element of working capital cycle moving from one bank to another which were priced below the Treasury bill and bond rates,” Hatton National Bank (HNB) MD/CEO Jonathan Alles told a recent webinar organized by CT CLSA Securities (Pvt) Ltd.
In particular, he highlighted the potential interest rate risks for banks associated with such repricing of corporate debt with new facilities that are aimed at reducing finance costs by capitalising on existing rock-bottom market interest rates.
“We are not keen to get into that without knowing how long the current low interest rate regime will prevail. We are consciously letting them go, because it doesn’t make sense to take them on board at those prices. Perhaps, we don’t have an appetite to take an interest rate risk in granting low and fixed-rate loans over 3-5 years without seeing the interest rate cycle horizon unfolding,” he elaborated.
Global interest rates recently have been showing signs of moving towards a tightening cycle amidst inflationary concerns. The CB recently allowed marginal increases in Treasury security auctions following consecutive undersubscribed auctions. However, the CB reiterated its position to maintain the current low-interest rate regime.
Commercial Bank MD/CEO S. Renganathan noted that business expansion purposes have also contributed to the acceleration seen in credit demand by corporates.
“We have seen corporates investing and getting on with their plans to expand their business. The growth in the corporate segment in the first quarter of this year was higher compared to SME and retail segments last year. I believe that we will have a positive trend in advances growth, which will be mostly driven by the coporate sector in the first half of the year,” he said.
According to CB, banks’ willingness to lend to corporates accelerated during the first quarter. However, it’s expected to slow down in the second quarter.
Overall, Renganathan expects credit disbursements to private sector to grow by 4-5 percent by year-end, below CB’s expectations of 12 percent.
The latest CB data showed credit disbursements to private sector slowing in April in the wake of COVID-19 third wave.
The CB, early this year, directed licensed banks to maintain a minimum of 20 percent YoY increase in credit disbursements to individuals and businesses in the MSME sector.
In the first quarter of the year, banks’ willingness to lend to MSMEs accelerated, while rejected MSME loan applications declined significantly.
Although, Commercial Bank saw an improvement in interest margins in the first quarter compared to the previous quarter, Renganathan expects a slight decline in bank’s interest margins in future.
“This particular trend cannot continue. Interest rates are coming down in advances. It will gradually come down,” he noted.
Adding to that, Alles said that lending rates have declined faster than long term fixed deposit rates.
Meanwhile, the banking sector is expecting only a marginal increase in customers seeking moratorium on loans under the recently announced debt relief round.
Commercial Bank expects its loan portfolio under moratoria to increase marginally to 7-9 percent in the current quarter at most, while HNB expects 3 percent increase to 15-18 percent by October.
However, both banks expect number of loans under moratoria to decline gradually.
Similarly, SDB bank, which has a large SME customer base, also expects only a marginal increase in its loan portfolio under moratoria,
“Customers are realising the cost associated with it. There are no free-lunches,” SDB bank CEO Thilak Piyadigama remarked.
In the same period, last year, a record 20-40 percent of loan portfolios of banks came under moratoria.