AMCs turn eager lenders to companies

With banks’ lending rates hitting a high, asset management firms have raised Rs 1.2 lakh cr through FMPs in 1.5 yrs.

Indian companies have found an eager lender in asset management companies (AMCs). With interest rates rising 300 basis points in the last one-and-a-half years, AMCs have raised as much as Rs 1.2 lakh crore through fixed maturity plans (FMPs) and companies account for more than half of this. The same money is being used to fund companies by investing in their papers.

Senior AMC sources say that the process of lending to companies had gathered traction due to high lending rates of banks. “We have set up a team dedicated to analysing corporate papers like commercial papers (CPs), corporate bonds (CBs) and non-convertible debentures (NCDs),” said the CEO of one of the top five fund houses.

Companies also stand to benefit from this. For instance, an AAA rated company has to pay 9.5-10 per cent for commercial papers of up to one year. Similarly, for corporate bonds of longer tenures, they have to pay 9.6-9.75 per cent.

“In comparison, banks charge 50-200 basis points over the base rate, in the current market scenario, even for the best of companies,” said a risk management head of a bank.

That is, considering that the base rate of State Bank of India stands at 10 per cent, the cost of short-term loans would be 10.5 per cent and 11-12 per cent for loans of longer terms for top-rated companies. The rate of interest would keep rising for companies rated lower.

While the mutual fund industry lends to companies through other schemes, like liquid, liquid-plus and income schemes, FMPs have come to the focus once again because fund managers are getting money that allows them to take calls for the longer term.

Exiting these schemes after they have been listed on the stock exchanges is difficult in the absence of a robust secondary market. As a result, investors in these schemes have to be locked in for the entire tenure.

However, both retail and corporate investors have been aggressively investing in these schemes because the attractive rates are making these popular for investors too. Axis Mutual Fund CEO Rajiv Anand says: “FMPs have certainly caught the fancy of retail investors because of predictability in returns.” In fact, in the wealth management and private banking segment, vis and vis bank deposits, these products are being aggressively routed to high net-worth individuals.

The main competition for FMPs comes from banks’ fixed deposits. But the rates are quite competitive. Sample this: The country’s largest bank, State Bank of India, offers 9.25 per cent on a one-year fixed deposit, with the rate staying the same for up to 10 years. Returns from a one-year FMP, at 9.4 per cent, according to industry sources, is slightly higher. And, the portfolio consists of only bank certificate of deposits (CDs). A slightly riskier portfolio that invests in commercial papers will offer higher returns of 9.6 per cent.

Importantly, the post-tax returns make these more attractive. For an investor in the highest income-tax bracket (30 per cent), returns would be around 6.25 per cent on an FD. On the other hand, returns from FMPs would be taxed at 10.3 per cent without inflation indexation, and 20.6 per cent with indexation.

Even if one does not take the inflation indexation benefit, the return would stand at 8.43 per cent.

For someone in the lowest income-tax bracket (of 10 per cent), the returns from FDs and FMPs are comparable. Also, if someone goes for inflation indexation, the benefits will also be substantial, because of the high inflation rate of 9-10 per cent.

Importantly, fund houses make FMPs more interesting by having 13-14-month products. In such products, an investor gets double indexation benefits. That is, if an FMP is bought in April 2011 and is maturing in May 2012, the investor will get double indexation benefits — one for 2010-11 and another for 2012-13.