NBFCs throng bond mkt to fund festival credit demand

A number of non-banking financial companies (NBFCs) have tapped into the debt capital market ahead of the festival season to meet increasing credit demand as bank funding slows.

On Tuesday, Aptus Value Housing Finance secured Rs 300 crore at an interest rate of 8.75 per cent through bonds maturing in five years.

ICICI Home Finance Company turned to the market to raise Rs 275 crore at 7.94 per cent, alongside another Rs 300 crore at 7.95 per cent, through bonds maturing in five and three years, respectively.

Bids for ICICI Home Finance are expected to close on Thursday. Meanwhile, InCred Financial Services raised Rs 215 crore.

Since August 1, NBFCs have raised Rs 73,820 crore via corporate bonds, according to PRIME Database.

“Following the Reserve Bank of India's decision to increase risk weight (in November 2023), banks have hiked interest rates and become more selective in their lending practices, driving companies towards alternative funding sources like commercial papers (CP) and bonds,” said Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap LLP.

“Firms expecting rate cuts soon are opting for CP issuances, while larger AAA-rated firms and PSU entities seeking long-term financing are favouring the bond market, where investor appetite remains robust.

"High-credit NBFCs, particularly those rated AAA and AA+, are increasingly turning to the market for long-term funds.

"More than 80 per cent of total fundraising since April has come from NBFCs.”

AAA-rated firms raised Rs 54,680 crore through corporate bonds between August 1 and September 16, representing 74 per cent of the issuances, while AA+ rated NBFCs accounted for 8 per cent of the total.

In August, total CP issuances rose to Rs 1.4 trillion, up from Rs 1.05 trillion in July.

Banks have shown increasing reluctance to lend to NBFCs since the regulator increased the risk weight of such loans by 25 percentage points in November 2023.

As on July 26, 2024, outstanding bank loans to NBFCs stood at Rs 15.29 trillion, down from Rs 15.48 trillion in March.

Year-on-year growth in bank loans to NBFCs slowed to 12.7 per cent by July, compared to 19.9 per cent the previous year.

Borrowing rates for NBFCs in the market have softened, reflecting a fall in benchmark bond yields.

“Rates have dropped as yields on government securities have come down.

"So, there is definitely interest in raising funds through the debt capital markets.

"However, large value fundraising remains challenging, with volumes skewed towards PSU or corporate house-backed NBFCs.

"It is mostly the better-rated NBFCs that are able to access the capital market for fundraising,” a rating agency official said.

The yield on AAA-rated 10-year corporate bonds has fallen by 9 basis points since August, while that on five-year bonds has softened by 29 basis points.

Meanwhile, AA+ rated 10-year and five-year corporate bond yields have dropped by 3 basis points and 6 basis points, respectively, over the same period.

According to PRIME Database, during this period, REC led the mobilisation with a Rs 6,820 crore mopup, followed by Power Finance Corp at Rs 5,791 crore, LIC Housing Finance at Rs 5,760 crore, and National Bank for Agriculture and Rural Development (Nabard) with Rs 5,000 crore.

The National Bank for Financing Infrastructure & Development issued bonds worth Rs 3,911 crore in August.

Together, these five issuers accounted for 38 per cent of the total amount raised during the month.

“During the festival season, we expect to see more such issuances,” said a dealer at a state-owned bank.

“As rates continue to soften, there will likely be an increase in short-term debt issuances like CPs,” he added.