NBFCs looking at offshore funds to diversify borrowing sources

To diversify borrowing sources and reduce dependence on traditional funding avenues like banks, mutual funds and insurance companies, non-banking financial companies (NBFCs) and housing finance companies (HFCs) are now looking to tap into the offshore credit market via masala bonds, external commercial borrowings (ECBs) and foreign currency bonds.

“So far, NBFCs had no appetite. But since the appetite is coming back, all the HFCs and NBFCs are looking at various avenues of funding like retail bond issue, foreign institutional investor’s (FIIs') money and offshore issuances,” said Ajay Manglunia of Edelweiss Securities.

After sudden defaults by Infrastructure Leasing & Financial Services (IL&FS) group last year led to a credit crunch, the traditional avenues of borrowing for HFCs and NBFCs had come under some strain. And since these relied heavily on banks, insurance companies and mutual funds for funding, there was a liquidity crunch situation. The cost of funds had also gone up. 

The relaxation in the ECBs and masala bonds norms has made it attractive for the NBFCs and HFCs to tap into the offshore credit market for funds.

The Reserve Bank of India (RBI), in January this year, reduced the maturity tenor of ECBs, increased borrowing limits and removed qualification restrictions for companies wanting to borrow funds from abroad. Industry experts are of the opinion that the overseas route for funding will not have much bearing on the cost of funds as it will depend largely on the timing and dollar-rupee hedge costs. But, this will certainly help in diversifying the liabilities of these NBFCs and HFCs.

According to Karthik Srinivasan of rating agency Icra, “Since the rupee cost of funds for NBFCs has gone up in the recent times, at this point in time, if NBFCs get an opportunity to raise funds from overseas route, it will be to diversify their borrowing sources. But, the investor and lender appetite will remain the key. Also, availability of funds and cost of funds will be points of consideration.”

“The cost of funds at which they raise money from the overseas route will depend on when they do it, what is the dollar rupee hedge cost at that point in time,” Srinivasan added.

According to Manglunia, “There is not much of a difference in the cost of funds when it comes to offshore issuances and traditional avenues of funds (banks, mutual funds). There is a difference of 30-50 bps. It is mainly being done for the sake of diversification and availability of funds.”

Moreover, “with the recent RBI relaxation on the diversification rule, it looks like FIIs are more comfortable and now, as ample limits are available for them to invest in any tenor, we can expect decent flows in this and next quarter,” he added.

NBFCs like L&T Finance and M&M Finance are looking to tap into the offshore credit market as soon as possible while Shriram Transport Finance has already raised $400 million via a dollar bond sale. The threshold set by the RBI in terms of foreign investment in any finance company is $750 million in a fiscal year.

“We will raise funds through masala bonds and ECBs. We are examining it. It depends on appetite, timing, and rate,” said Dinanath Dubhashi, managing director and chief executive officer of L&T Finance.

“It is done as an overall strategic intent to diversifying the sources of funds. Today we borrow from mutual funds, insurance companies and banks. To diversify it more, one from retail public, HNIs (high net worth individuals) and then some other ways also like ECBs or masala bonds from foreign investors,” Dubhashi added.