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SBI hopes rising yields will spur companies to look to banks

August 08, 2022

SBI hopes rising yields will spur companies to look to banks
The State Bank of India (SBI) is counting on renewed corporate interest in drawing credit as rising bond yields make market borrowing more expensive.

With the interest rate cycle turning around due to soaring inflation, bond yields have tightened in recent months, pushing up overall corporate borrowing costs in the debt market.

However, corporate bank lending rates have not moved in parallel since they are pegged to individual banks’ incremental cost of funding based on lending rate (MCLR), a slower transmission internal benchmark.

Spreads between corporate bonds and benchmark 10-year government securities have also widened over the past three months.

For example, a AAA-rated corporate borrower had to borrow at a spread of 36 basis points (bps) above the 10-year government bond on August 3, compared to 1 basis point on May 2, according to data compiled by CARE Ratings.

The yield on the benchmark sovereign bond rose 10 basis points over the same period. By comparison, banks’ median one-year MCLR rose 30 basis points between May and July, according to RBI data. A basis point is one hundredth of a percentage point.

“Capacity utilization in the economy is around 75%, and we expect more businesses to look to us for credit facilities than the options available in the past to raise funds. in the securities market,” SBI Chairman Dinesh Khara told reporters on Saturday.

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