Contrary to the regulator's expectation, banks have chosen to invest in bonds with AA rating and above
Companies including HDFC, Power Finance Corporation, Sundaram Finance are the first few to raise funds under the TLTRO facility
The result of Reserve Bank of India's Targeted Long-Term Repos Operations (TLTRO) conducted over three tranches have shown that banks have invested only in high-rated debt papers of companies. Contrary to the regulator's expectation, banks have chosen to invest in bonds with AA rating and above.
The TLTRO was introduced by the RBI to help companies, including financial institutions, manage their cash flow issues in the wake of the covid-19 outbreak. The guidelines stipulate that banks could access 3-year funding and use it to invest in investment grade corporate bonds, commercial paper and debentures. Of this, banks are required to acquire up to 50% of their incremental holdings of eligible instruments from primary market issuances and the remaining 50% from the secondary market. The regulations also allow the exposure under this facility not be accounted for calculating large exposure framework.
"Banks have fully utilised the limit under the first two tranches. Mostly the funds have been given to AAA or AA rated companies," said a senior treasury official with public sector bank.
Companies like Housing Development Finance Corporation (HDFC), Rural Electrification Corporation, Power Finance Corporation, Oil and Natural Gas Corporation Ltd, Sundaram Finance are the first few to raise funds under the TLTRO facility. Reliance is looking to raise non-convertible debentures worth up to ₹25,000 crore whereas National Thermal Power Corporation Ltd is also planning to raise funds.
“We are engaged with a lot of high grade companies for primary issuance. This is a Held to Maturity (HTM) issuance for banks. So the banks have to take a call what kind of credit risk they are comfortable taking in the HTM portfolio," said the treasury official of a private sector bank.
According to banks, the objective of TLTRO is two-fold: to allow issuers with maturing paper but repayment troubles to refinance their outstanding paper, and, to bring down cost of funding for corporates, who access bond market. Banks charge anywhere between 7.5-7.75% for private AAA rated bonds and 6.5-7.25% for public sector companies. Bankers believe that if TLTRO was not available, yields would have spiked just like in the case of state government bond yields which rose to 8.5% last week.
“People believe that RBI is giving banks cheap funding at 4.40%. It’s not an uncollaterised facility for banks to take advantage of. We need to have excess SLR. Real advantage of TLTRO is the spread between government bonds and cost of funding. A 3-year government bond is at 5.5%. Under the TLTRO, banks get funding from RBI at 4.4% floating rate. Cost advantage to banks is 100 basis points that banks can look to pass on. The current market rates are already reflecting that banks have started buying bonds," said the second official.
However, corporates are not convinced as they believe that banks are quoting a much higher yield, putting pricing pressure for issuers in the primary market. “Secondary market is very active. Mutual funds are desparate to sell their high-rated debt as they are facing massive redemption. Banks are demanding anything from 7.5-8%," said a corporate honcho.
According to Prime Database, corporate bonds worth ₹91,902 crore and commercial papers worth ₹77,797 crore are coming up for maturity till May end. Among corporate bonds, ₹47,579 crore worth of bonds with rating below AAA is due for maturity over the next two months. While the high-rated corporates are assured of funding under TLTRO, financial institutions like non-banking finance companies and microfinance institutions with rating below AA will face challenges. Several banks have already made it clear that these institutions will not be eligible for moratorium on loan repayment. That leaves these companies with limited option to raise cheap funds.
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