Retail bond issuances in the current financial year, FY2019 are likely to surpass their previous high of Rs 42,383 crore witnessed in FY2014. Much of this is expected to come from the Non-Banking Finance companies (NBFC)’s which have typically accounted for ~40% of the retail bond issuances during the FY2011-18 period; the balance being accounted by tax-free bonds.
As per an ICRA note, this trend is visible as retail bond issuances from NBFCs during Q1FY2019 itself are likely to surpass ~Rs 20,000 crore, much higher than ~Rs 4700 crore during FY2018.
Says Mr. Karthik Srinivasan, Senior Vice President & Group Head, Financial Sector Ratings, ICRA, “Typically NBFCs have relied on diverse funding sources like banks, commercial papers, NCDs (retail and private placements), overseas issuances and retail fixed deposits for their funding requirements. However tighter liquidity conditions, rising bond yields and weak capital position of public sector banks (PSBs) that enjoy a dominant 70% share of bank credit is likely to increase retail bond issuances by NBFC during FY2019.”
Overseas funding despite RBI’s relaxed norms is not a viable option due to hardening global yields and depreciating Indian Rupee (INR) leading to higher hedging premiums.
In case of rupee denominated overseas borrowings, investors may want higher returns to offset the currency risks.
Therefore, in such a scenario, to support their credit growth, NBFCs may have to meet part of their funding requirements through retail bond issuances during the year.
As higher credit growth is usually witnessed during the second half of the financial year, due to relatively tighter liquidity conditions and consequently higher interest rates; historically retail debt issuances from NBFCs have been concentrated during second half of the financial year.
ICRA note says that NBFC’s retail bond issuances were highest ever at ~Rs 29,300 crore during FY2017 and that was during H1FY2017 (~ Rs 23,900 crore), i.e. prior to the demonetisation during H2FY2017. Following the demonetisation drive, with the rise in systemic liquidity, NBFCs shifted back to private placements of debt securities till end FY2018.
With the hardening bond yields from Q3FY2018 the credit demand from NBFCs shifted to banking channel, which is reflected in growth of bank credit outstanding towards NBFCs to Rs 4.96 lakh crore as on March 30, 2018 as against Rs 3.68 lakh crore as on December 22, 2017; sequentially higher by 34.8%.
However, this trend is unlikely to sustain given the numerous challenges PSBs are currently grappling with and, the tighter RBI guidelines on large exposure framework.
It is likely that funding sources may undergo a change and NBFCs may tap retail investors through higher fixed deposit rates as well as public issue of NCDs as Mutual Fund, one of the key investor segments, could likely see moderation in flows in a rising interest rate regime.
“To sum up, reducing liquidity surpluses and rising bond yields may require NBFCs to tap retail bond issuances during FY2019 to meet their funding requirements given the challenges of the banking sector and overseas borrowings. Historically NBFCs have offered 25-75 bps higher interest rates for retail category investors in their retail bond issues thereby making the instruments attractive compared to other debt instruments like bank deposits. It may also result in better investor appetite amid limited increase in rates for bank deposits and volatile returns in debt and equity markets,” concludes Mr. Srinivasan.
