• Notification Date: 21-02-2025
• Notification No: N/A

Credit War Escalating in Mid-Size Corporate World, Heightening Risks Fears

Increased competition between banks in the mid-corporate loan market has resulted in mispriced loans, putting banks at risk in the case of a liquidity shortage. Corporate customers seek alternative sources of funds while institutions such as HDFC and Kotak Mahindra Bank increasingly become cautious about irrational pricing, which will distort market forces.

The caution among bankers is that when there are a lot of players in the market, and then the risk becomes priced lower. Manish Kothari from Kotak Mahindra Bank talked about risk-adjusted pricing while analyzing low credit costs witnessed on MSME loans of late. While growth in mid-sized corporate loan growth has been breath-taking at 20% year-on-year growth as of Dec 2024, bankers are being prudent while offering loans without seeking long-term sustainability.

Although the Reserve Bank of India (RBI) cut the repo rate at the start of 2025, banks are not willing to lend competitively without risk compensation. Others are charging MSME loans with spreads of less than 1.5%, significantly lower than the 7% 10-year government bond yield. HDFC's CFO, Srinivasan Vaidyanathan, also shared similar sentiments, pointing to lending at the right price to remain profitable while controlling the risk.

Banks are calling on the regulators to go slow as competition keeps increasing in the mid-corporate lending space.