Following the RBI’s restriction on banks to issue guarantees for bonds, Indian companies which were looking to raise large amounts from the market on the back of such comfort (bank guarantee) will have to rework their plans.
Companies may have to offer a higher interest rate to compensate prospective investors for taking enhanced risks. This is more so when there are concerns about financial health.
A top official with a Mumbai-based public sector bank said, “Companies — which are not in the pink of health will find fund (raising without bank guarantees) to be a costly affair. First, the rating for paper (bond) will be lower compared to what it would have been with bank guarantees. Second, issuer will have to offer higher interest rate to compensate for taking risks”.
“It will drive companies, which find it tough to raise funds from market to opt for bank loans. It could increase the credit demand”, said BA Prabhakar, executive director, Bank of India. The bank guarantee offered a sort of credit enhancement and the issuer could offer a fine rate by playing the guarantee card. Icra Managing Director Naresh Thakkar said a bank guarantee for bonds is part of the effort to optimise costs, especially when the amount raised is huge.
Some companies had approached us with plans (for rating) on the basis of bank guarantees. RBI’s move could have an impact on the plan for such entities, he added.
Sources said the trigger for RBI’s missive to banks was State Bank of India’s guarantees to Tata Motors’ non-convertible debentures (NCDs) issue of Rs 4,200 crore. The guarantee amount required was estimated at Rs 4,900 crore at the beginning of the transaction.
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Banker said while banks looked at such transactions as source of fee-income, they were careful about client track record.
Banks have been very selective. They have issued partial guarantees and full guarantees only in some cases.Banks will not be affected much by RBI decision as the fee-income from issuance guarantees for financial instruments is not large, Prabhakar said.
Nishikant Das, director, Debt Capital markets, Standard Chartered Bank, said, “I don’t think fee-based income of banks will be affected by RBI’s latest move, because such transactions in which lenders have fully guaranteed bond issues, have been very few.”
“Currently, the corporate bond market is a bit shallow, especially for issues rated below AA or AA-. When a bank guarantees an issue, the rating of the lender becomes the effective rating of an issue and corporate bands are highly dependent on ratings,” Das added.