NBFCs lure retail investors with high yields as banks tighten purse strings

As banks become increasingly risk-averse in lending to the non-banking financial companies (NBFCs), while mutual funds and insurance companies slow down their investment of debt papers from the sector, the firms are trying to lure retail investors with high yields in a falling interest rate environment. 

For the companies, non-convertible debentures, or NCDs, also allow them to diversify their liability profile. The Infrastructure Leasing & Financial Services (IL&FS) fiasco and Dewan Housing Finance Corporation (DHFL) defaults, both AAA companies before they stumbled last year, has complicated the situation for the NBFC segment, even as the government and the Reserve Bank of India (RBI) are taking a plethora of measures to encourage banks to start lending to the sector. On Wednesday, RBI Governor Shaktikanta Das said no big NBFC would be allowed to fail. 

The RBI governor’s assurance should give investors enough confidence to start believing in the NBFC sector again, say bankers. And the high yields offered by the firms should be lucrative enough for investors.

“Corporate firms are trying to diversify their asset liability profiles and trying to reduce dependence on one or two sources of borrowing. With the RBI cutting interest rates, this may be a good time to raise funds via NCDs,” said an investment banker.

On Thursday, Tata Capital Financial Services, a subsidiary of Tata Capital, said it would hit the market with tranche 2 of its NCD to raise up to Rs 4,126 crore, of which Rs 500 crore would comprise the base issue.

Tata Capital is one of the few names exploring this avenue. Recently, JM Financial and IIFL have tapped the market. IIFL Finance is issuing secured and unsecured redeemable NCDs, totalling Rs 100 crore, with a greenshoe option to retain oversubscription up to Rs 900 crore. JM Financial Products is raising Rs 500 crore through NCDs.

Many more are lining up with their offering.

These could include public sector undertakings such as Rural Electrification Corporation (REC) and Power Finance Corporation (PFC), said bankers familiar with the matter.

According to the sources, both PFC and REC have filed request for proposal (RFP) to get bond arrangers about a month ago. Both the public sector units (PSUs) want to issue taxable bonds of Rs 10,000 crore each through several tranches in the current financial year (FY20).

This would also be their first taxable bond issuance after they came up with tax-free public bonds a few years ago.

According to a banker, REC could issue Rs 5,000 core by the end of this month, while PFC would follow suit with Rs 2,000 crore issuance in the next month. However, the plan is not firm yet.

“It is likely that they have got an approval, and are sounding off the arrangers. There was a similar exercise by the National Highways Authority of India six months ago, but that did not fructify eventually,” said a senior bond arranger. 

Meanwhile, Tata Capital Financial, which has a large book in the consumer finance and SME space, will offer investors the option to invest for three, five, seven and 10 years, offering interest rates ranging from 8.35 to 8.85 per cent. 

The NCDs are AAA rated by CRISIL and CARE and will be listed on the NSE and the BSE. The issue is secured except for the 10-year option which is sub-debt and unsecured.

This would mean the spread over the 10-year government would be substantial even for a AAA company, indicating the liquidity squeeze in the system.

The 10-year bond yield closed at 6.40 per cent on Thursday. 

“We are competing with fixed deposits and not just the yields on G-secs. There are not too many AAA-rated issues coming to the market right now and the rates offered are attractive,” said Kiran Joshi, head - treasury, Tata Capital.

According to sources, HDFC, Reliance Industries, or its telecom subsidiary Reliance Jio, and UltraTech Cement may be some of the other corporate firms lining up for NCDs, ranging in size from Rs 1,000 to Rs 3,000 crore. 

An HDFC official said they are raising money regularly through private placements, as it has plans to raise Rs 45,000 crore in FY20. However, it is unlikely that the company would come for public issuance. Emails sent to Reliance and UltraTech did not elicit any response.

The typical sources of borrowing for corporate firms include banks, dollar and masala bonds, corporate deposits, and commercial papers. Recently companies have started raising money via ECBs as well. Tata Capital Financial Services, for instance, has recently raised $50 million through ECBs and is looking to raise another $100 million by September 30.

With inputs from Amritha Pillay