Lenders Turn Their Back On Lower Rated Borrowers Amid Rising Risk Aversion

Indian lenders are increasingly reluctant to lend to corporations rated below investment grade as economic conditions remain weak and defaults remain elevated.Borrowers rated BB and below have scarce access to funding from the debt markets. A reluctance from banks to lend to this segment and reduced sanctions from non-bank lenders could worsen the strains these lower-rated firms may already face.Industry-wide data of incremental lending to firms rated BB and below is not available. However, conversations with multiple bankers and loan portfolios of individual banks point to an increased skew toward higher rated borrowers.Cautious PrevailsFor instance, the country’s largest lender, State Bank of India, in an investor presentation dated Oct. 30, said it would engage largely with public sector undertakings and investment grade companies with viable projects, while keeping a close watch on the cash flows of the companies. The presentation had laid out the bank’s strategy till March 2021.SBI Chairman Rajnish Kumar, while speaking on the sidelines of an event, said BB and below rated companies have balance sheet stress, which makes lending risky.The bank’s total loan exposure to companies rated below investment grade stood at around Rs 56,000 crore as on Sept. 30, less than Rs 65,000 crore a year ago. The outstanding exposure would include existing loans, new loans and those that may have been downgraded from investment grade to sub-investment grade.According to a senior SBI official, banks feel that additional funding to low rated companies will lead to an increase in the risk weighted assets on their book, which leads to higher allocation of capital. Currently, the bank is only extending loans to low rated accounts where limits have been sanctioned in the past, the official said.According to the head of a mid-sized public sector bank, the banking system is still in a very “risk-off” mode owing to the stock of bad loans on their books and the slow resolution of troubled accounts. Moreover, 10 public sector lenders are also in the process of mergers, due to which they are trying to reduce stressed exposures on their books.Among other large public sector banks, the extent of sub-investment grade loans have fluctuated due to downgrades into that category. The lenders do not provide a break-up of incremental lending to such borrowers rated BB and below..Some of the larger private banks, too, are cautious in lending to this segment and have reduced exposure.In the case of ICICI Bank, the standard but below investment grade loan portfolio, came down to Rs 6,134 crore in September compared with Rs 37,000 crore a year ago. Most of the reduction happened because loans were downgraded to non-performing asset categories.Axis Bank has been seeing a consistent reduction in its BB and below rated portfolio owing to slippages. Under Amitabh Chaudhary, who took over as chief executive officer in December 2018, the bank has been following a conservative growth strategy, which emphasises on growing the loan book with a firm watch on risk.Yes Bank, however, saw considerable additions to its BB and below rated portfolio over the first six months of this financial year, mostly due to downgrades of existing loans rather than fresh lending to this segment.All three banks have stated that they intend to focus more on retail loans and focus on higher rates of companies.Emails sent to ICICI Bank, Axis Bank, Yes Bank, Punjab National Bank and Bank of India were not answered..Build-Up Of RiskTo be sure, banks are justified in taking a cautious approach towards lending to lower-rated segments.Brokerage house Jefferies, in a report dated Sept. 24, showed the build-up in leverage across lower rating categories. This leverage for firms rated A and below was significantly higher than those rated AAA and AA. The study was based on all BSE listed companies, after removing financial services firms and those which have already defaulted on their dues.The debt-to-Ebitda ratio for companies rated A was the highest at 6.3 times. Companies rated BBB had a debt-to-Ebitda of 5.2 times, while those rated BB had a debt-to-Ebitda of 5.6 times.Lower rated companies ought to focus on the core reasons behind their ratings, rather than just ask for more credit, a private sector banker said on condition of anonymity. Special situation funds, which specialise in extending capital to high-risk companies need to step in to bridge the funding gap and bring in management reform, he said..The Weak Get WeakerAvailability of credit to lower-rated firms has worsened after non-bank lenders were hit by a credit crunch, said Vish Iyer, a consultant to small- and medium-sized enterprises.NBFCs, which had been filling the funding gap for low-rated companies, have been out of the market over the last 12 months. Banks, which may finally consider a proposal from these companies are also seeking 100 percent collateral, which is a clear deterrent for these companies, he said.“It is truly a period of gloom for these companies because all sources of funding have become very difficult to access in the current conditions. Moreover, a merger between public sector banks has further slowed down the decision-making process,” Iyer said..Dhananjay Sinha, chief economist and research head at IDFC Securities, said that there is a lack of confidence among bankers.“Typically banks become more pro-cyclical whenever there is a crisis of confidence. This pushes them to make more adverse choices in terms of lending... This is evident from the credit growth data for the banking system,” Sinha said. “Moreover, NBFCs are also facing their own liquidity issues. If the low-rated companies continue without access to credit, it will lead to further NPAs,” he said.Non-food bank credit grew at 8.1 percent in September, showed the latest data from the Reserve Bank of India. Credit to industry grew at a tepid 2.7 percent, while credit to mid-sized firms, which often populate lower rating categories, declined by 0.7 percent, the data showed.With a toughened regulatory stance and fewer avenues to access funding, BB and below rated loans will continue adding to the bad loan pool of the banking system in the months ahead, unless credit growth comes back soon, said Karthik Srinivasan, group head of financial sector ratings at ICRA.

Lenders Turn Their Back On Lower Rated Borrowers Amid Rising Risk Aversion

Bank lending skews further towards high-rated borrowers amid risk aversion.

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