Mumbai: On Tuesday, Rural Electrification Corp. Ltd (REC) will enter the bond market to raise Rs500 crore worth of nine-year and 15-year bonds, with a so-called greenshoe option to retain an additional Rs1,500 crore. Only a fortnight back it had raised Rs1,250 crore from the bond market.
REC is one of many non-banking financial companies (NBFCs) that are accessing this source of finance.
In the first half of this year, NBFCs raised Rs35,808.20 crore by selling bonds, a 40% leap from the previous year, according to Bloomberg data. This amount is more than one-third of the Rs93,605 crore worth of bonds sold by Indian companies this year.
“The cost of borrowing is much cheaper than bank loans,” said H.D. Khunteta, director of finance at REC. “Our overall cost is more or less the same as last year.”
REC wants to raise some Rs28,000 crore this year, and sold its last batch of 15-year bonds at 8.75%, 50 basis points (bps) higher than the yield on government bonds of comparable maturity. One basis point is one-hundredth of a percentage point.
The Reserve Bank of India (RBI) raised its key interest rates by 25 bps last week. Analysts and bond dealers expect another round of rate hike in July-end, when RBI reviews its monetary policy and overall 150 bps raise in interest rates during the year. NBFCs, according to them, will increasingly tap the bond market with longer maturity papers to lock in the current rates.
“Spreads have narrowed considerably,” said Alpana Dave, vice-president at Edelweiss Securities Ltd, a Mumbai-based brokerage firm, referring to the gap between the yield on a government bond and that floated by corporations, including NBFCs.
“Earlier the spread was 100-150 basis points between bonds issued by an NBFC and a comparable government security; now it has narrowed to 50-60 basis points,” she added.
Demand for corporate paper had increased in the earlier part of the year from banks and mutual funds driving down the spreads. What’s also helping are growing signs of depth in India’s corporate bond market, with capital market regulator Securities and Exchange Board of India ruling that all trades in corporate bonds would have to be cleared and settled by a clearing company to eliminate counterparty risk and increase liquidity.
Apart from that, demand for funds from NBFCs has increased. A robust economy which is forecast to grow at 8.5% this fiscal year has pushed up demand for assets such as cars and houses from individuals. Companies, too, are starting to build capacity and infrastructure, and all of them are approaching lenders for capital.
Indeed banks’ loan books are growing, but they may not be able to meet the credit demand of corporations as well as individuals as the deposit growth so far has been sluggish. Till mid-June, the year-on-year credit growth has been 19.6% against 15.7% a year ago. In contrast, the growth in deposits has been 13.9%, sharply down from 21.9% a year ago.
According to credit rating agency Crisil Ltd, “NBFCs’ disbursements are growing, collection efficiencies are improving and non-performing assets are coming down as they stay away from taking fresh exposure to unsecured loans. As they expand, the requirement for funds are also increasing.”
Typically, an NBFC raises around 40% of funds from banks, 20-25% from short-term loans, and the rest from long-term non-convertible debentures and other debt market instruments. These are supplemented by securitization as well as retail deposits for some NBFCs. But the tightening of liquidity and RBI rules, which prohibit banks from lending more than 15% of their capital funds to NBFCs, has driven these firms to enter the bond market in hordes.
“As they grow, NBFCs’ credit needs are also growing, but the banks are limited in their exposure to NBFCs,” said Viren Mehta, director at audit and consulting firm Ernst and Young India Pvt. Ltd. “The rates they are getting through the bond market are relatively better than what banks would offer them for loans.”
Borrowing more through the bond market not only enables these finance firms to diversify their sources of funds, but also extends the maturity profile of their borrowings, said Pawan Agrawal, director of ratings at Crisil. “Most NBFCs became acutely aware of the inherent risks in running a short-term asset-liability mismatch, particularly during the liquidity crisis (of 2008) and, therefore, want to increase the tenure of their average borrowings in line with their asset tenures,” Agrawal said.
The largest bond issue so far this year has been Power Finance Corp. Ltd’s Rs1,500 crore, 15-year bonds. Other prominent firms who raised money through this route include National Housing Bank, which sold three-year bonds for Rs750 crore, and Housing Development Finance Corp. Ltd, which sold four-year bonds worth Rs700 crore. Half of the 113 bond issues from NBFCs this year had tenures longer than five years. A Rs220 crore issue of the Indian Railway Finance Corp. Ltd had the longest maturity of 25 years.