Smaller PSBs engage in price gouging in the project finance industry

In order to increase their exposures to better-rated corporates, small and mid-sized public sector banks (PSBs) have become competitive in the project finance market, undercutting their larger peers.

According to bankers, there is fierce competition in the market among lenders to participate in the syndication of road and other infrastructure projects being carried out by highly regarded private sector entities and public sector units (PSUs). As per banking sources, players like NTPC were able to secure finance at 6.5 percent, only 160 basis points (bps) over the repo, even after the two repo rate hikes in May and June. This was before to Friday's 50 bps increase in the repo rate.

Additionally, there are numerous examples of a small PSB beating out one of the biggest private banks to participate in a high-profile syndication agreement. An official from a mid-sized private bank stated that "little PSBs are quite active presently, and one has actually slashed MCLRs (marginal cost of funds-based lending rate) to become more competitive." However, he continued, major competitors like State Bank of India (SBI) and Bank of Baroda (BoB) have been cautious with pricing, refusing to set interest rates lower than 7.2–7.25 percent. Loan rates have increased as a result of the consecutive rate hikes, although project funding is still accessible at a rate of about 6.7 percent, according to bankers. 

Apart from the five largest state-owned and privately held banks, according to Prashant Kumar, MD & CEO of Yes Bank, other PSBs have recently become more aggressive in their support of well-rated corporations. "The competition is fierce. In comparison to banks where liquidity is always more expensive, those with substantial deposits and a low CD (credit-deposit) ratio are better positioned to offer reasonable rates, he added. He continued, "At this point, Yes Bank would like to protect and enhance its margins.

It's interesting to note that a number of PSBs, including SBI, BoB, and Canara Bank, reported a sequential decline in their net interest margins (NIMs) in Q1 FY23. The majority of them have attributed the decline to the repo's staggered transmission. Dinesh Khara, the chairman of SBI, stated that the bank is now fairly at ease with the present trends in risk pricing. "Mispricing of risk has decreased, but until that time, people may still turn to this if they have too much liquidity on their balance sheets (mispricing). According to him, "As far as we as a bank are concerned, we are very careful in terms of preserving our NIMs and we are ensuring there should be no mispricing of risk." In June 2022, outstanding bank credit to large industries increased by 3.3 percent year over year (y-o-y) to $24 trillion, compared to a decline of 4.8 percent in June 2021.