Mahindra and Mahindra Financial Services, the non-bank arm of the Mahindra group, is looking to tap the overseas markets to raise at least $460 million through a mix of loans and bonds.
The company had raised $200 million in FY19 through the external ECB route, and is in the process of raising another $160 million in overseas loans, said Ramesh Iyer, vice-chairman and managing director, Mahindra Finance, in an interview.
The lender is also looking to raise another $300 million through offshore bonds and is in the process of obtaining an international credit rating, Iyer added.
“Taking into account Reserve Bank of India’s (RBI) yearly automatic route limit of $750 million, we would be left with a headroom of $590 million in FY20. We raised the $200 million at Libor plus 160 basis points (bps) in FY19 and the upcoming one (of $160 million) is expected to be closer to Libor plus 150bps."
London Interbank Offered Rate (Libor) is a key global benchmark for interest rates. One basis point equals one-hundredth of a percentage point.
Raising money from overseas would let Mahindra Finance diversify its sources of fund raising. It would also let the company tap international funds at a time when local liquidity has dried up.
Mahindra Finance primarily offers financing for purchasing new and pre-owned auto and utility vehicles, tractors, cars, commercial vehicles, construction equipment and for small and medium enterprises.
Simplifying ECB norms in January this year, the RBI allowed all entities eligible for foreign direct investment (FDI) to borrow up to $750 million each year under the automatic route. “All eligible borrowers can raise ECB up to $750 million or equivalent per financial year under auto route," according to the central bank’s 16 January notification.
“When you usually go to the bond market, a benchmark deal as expected by the institutional market is of $300 million. Effectively, one can say that whenever we may want to approach this offshore bond market, we will look to raise at least $300 million," he said, adding that once it secures the rating for the bond, “the investor can come through any route—dollar-denominated, masala, among others—as we will know which market is right and most attractive".
The tenor of these instruments could be at least three years and the fully hedged cost would be 5-10bps, lower than the current domestic rates, he said.
Domestic companies raised $2.65 billion through the automatic route in ECBs in April this year, compared to $2.25 billion in the same month last year, RBI data showed.
As on March 2019, Mahindra Finance’s funding was largely from banks, which have a 46.4% share in total funds, followed by insurance and pension funds at 15.8%, and mutual funds (14.4%), among others. On the liquidity drought in the non-bank sector, Iyer said it is not an industry problem, but a player-specific issue.
“See, it originally started as an industry problem as NBFCs were unable to raise money. I think what we have seen in a period of time, maybe, is every lender is now going to player-specific. For instance, we have not had problems raising money."
Iyer said that if the refinance window is allowed by the central bank, non-banking financing companies (NBFCs) could borrow from the refinancing window against their assets.
“At the NBFC association level, there has been this discussion on how this needs to be structured because there is no single class of NBFCs. I think that is the level of discussion and not about why NBFCs need or do not, it is a discussion on how we create a structure which would work seamlessly," he added.
Iyer said while rural demand is slow in the first half of the year, it eventually picks up in the second half due to the onset of the festive season. While footfall at automobile dealerships has been comparatively low this year, he said, the company is not feeling the pressure because it is able to generate 15-20% of its monthly business on its own.
Pre-owned vehicles, he said will be in focus for the company. “Earlier pre-owned vehicle used to be 5-6% of our balance sheet, it moved to 8-10% now and we think it has an ability to become 15% of the balance sheet," said Iyer, without giving a time frame.