Why this state-run lender is courting lower-rated clients

With few 'AAA' and 'AA' firms, banks must tap lower-rated borrowers to grow, said a rating agency analyst

- Shayan Ghosh

State-owned Bank of India is looking to go beyond its comfort zone of lending to companies with the highest credit ratings to shore up margins, which is already under pressure and could sink further following the Reserve Bank's rate cut.

Chief executive Rajneesh Karnatak said in an interview that the bank is looking for companies rated 'BBB' or 'A' to lend to, as those rated 'AA' or above have more bargaining power on lending rates.

Credit ratings offer insights into a borrower's financial health, with a high rating signifying a lower possibility of default than low-rated counterparts. Banks charge a spread on top of the benchmark lending rate to arrive at a final rate, and better-rated companies or those with more wherewithal are able to extract a finer pricing.

Intense competition among banks to onboard top-rated companies also plays a role in determining lending rates.