Averse bankers, willing RBI push companies towards the bond market

Corporate fund-raising momentum suggests that companies, at least the better-rated ones, may have permanently moved into the bond market, shaking off their dependence on bank loans.

However, it is not a linear trend for those rated “A” and below, who still heavily depend on banks for their funding needs.

The corporate bond market is still dominated by financial companies, but non-financial companies have marked their presence in the past one year.

Part of this was due to extraordinary accommodation offered by the Reserve Bank of India (RBI) last year through its long-term repo operations (LTRO) funds, and targeted LTRO or TLTRO.

Firms raised money for up to three years under those windows, and are now going slow in raising fresh debt, especially as capacity utilisation remains well below 70 per cent.

This is particularly true for the first quarter of this fiscal year, which would end on Wednesday. The second wave of the pandemic has chipped away consumer demand, and firms are hesitant to step up their capital expenditure plans.

Companies, though, had raised funds aggressively in the third and fourth quarters of the last fiscal year, when the first wave of the pandemic subsided and the lockdowns were easing.

In the third quarter ended December 31, 2020, non-finance companies raised Rs 2.10 trillion from the market, and in the fourth quarter, this rose Rs 3.1 trillion. In the third and fourth quarters in 2019-20, fund raising through corporate bonds by non-financial firms was Rs 1.52 trillion and Rs 1.91 trillion, respectively.

A point to be noted here is that government-backed companies and public sector units benefited the most because they dominate issuances in the AAA-rate-obsessed bond market, arrangers say. Only a handful of pure private firms enjoy the same rate that these government-owned companies do. But rates did soften across the curve to benefit others.

Chief financial officers say at present the better-rated companies are raising funds because bonds are 150 to 250 basis points cheaper than bank loans and are easily refinanceable.

Besides, this debt is available in the short-medium and medium-long range tenors, which others cannot give and the proceeds regulations are much more flexible unlike bank loans.

“We are seeing this trend as banks are reluctant to extend loans to NBFCs unlike earlier -- due to a sharp deterioration in NBFCs’ loan quality due to Covid-related defaults,” said Prabal Banerjee, former group finance director of Bajaj Group.

For AAA-rated corporate bonds, the yield was 6.85 per cent in May 2020, which eased to 5.38 per cent in April 2021 and further to 5.16 per cent in May 2021. The spread with government securities of a similar maturity eased from 205 basis points (2.05 per cent) in May 2020 to 24 basis points in May 2021, according to Joydeep Sen, consultant, fixed income at Phillip Capital.

The corporate bond issuance, though, has dipped in the first quarter of 2021-22, as is typically the case with the first half of any fiscal year.

Besides, TLTRO money is still with the firms. Non-financial firms have raised a little more than Rs 1 trillion in the first quarter, which is almost half that in the corresponding quarter last year, when the RBI rates plummeted due to LTRO operations.

“The three-year borrowing done in 2020 will last till 2023. The firms need money, but less than usual. Incremental funds are needed for working capital and running the business, but not for expansion,” said Sen.

The firms essentially gorged on easy money policy by the RBI, where three-month commercial paper rates dipped below the overnight reverse repo rate for top-rated companies, as well as the risk aversion by banks who wanted to stay away from giving loans to non-banking financial companies (NBFCs) due to trouble in the sector.

The situation of the NBFCs has improved substantially since then. NBFCs as a group were borrowing at an average cost of 8.38 per cent in June 2020. They were raising funds at an average cost of 6.17 per cent in May 2021. For housing finance companies, the cost eased from 7.49 per cent in July 2020 to 5.95 per cent in May 2021. 

The sharpest drop happened in case of commercial papers, the preferred mode of borrowing for NBFCs and non-financial firms. CPs were priced at 9.84 per cent in March 2020 due to liquidity issues, but eased to 3.73 per cent in November 2020. In May this year, the average borrowing cost for less than one year funds was at 4.08 per cent.