Private placement of debt drops to Rs 6.5 trillion in FY18

The increasing reliance on private placement of debt seems to have reversed course.

Private placements raised Rs 6.55 trillion in 2017-18 (FY18), or half a trillion lower than it raised the previous year, show numbers from market-tracker Prime Database. This breaks a three-year trend which had seen the value of private placements more than double since FY14. Fewer issuers coming to the market, and rising interest rates are said to have contributed to the slowdown.

Private placements’ share as a percentage of bank credit to industry and services is at 13.79% for 2017-18, shows a comparison with data on deployment of gross bank credit by major sectors from the Reserve Bank of India.  Business Standard considered deployment of bank credit to industry and services. Industry includes micro, small, medium and large entities. Services include everything from computer software to transport operators.

Pranav Haldea, managing director of Prime Database said that the decline is largely due to the spike in yields. 

“The year saw a great deal of deleveraging, and demand for additional capital has been low. Capex plans have also not been taking off which could all have contributed to the decline in private placements,” said Ramanathan Krishnamoorthy, founder and chief executive officer at Spectrum Wealth Solutions.  

Other experts also pointed out to tighter liquidity conditions and higher interest rates. Issuers have been reluctant to borrow at higher rates, and institutional investors have not always been major buyers.

The year ahead may be an interesting one too, because of multiple reasons for uncertainty, including crude prices, monsoons and upcoming elections. 

 Teething troubles around new regulations, for example, lowering the limit for mandatory use of the electronic book mechanism from Rs 5 billion issues to smaller issues of Rs 2 billion is also likely to play a role, according to experts.   

"How the corporate bond market shapes up in the future will depend on the movement in rates and how much uncertainty there would be around elections. There would be no major capex if there is political uncertainty. 

There would only be limited fund requirement, perhaps for things like working capital and refinancing," said Dwijendra Srivastava - Chief Investment Officer – Debt 

“Borrowing from banks seems to be cheaper than borrowing from the market as of now. We will have to see if the trend persists. In the days ahead, oil will be the biggest near-term trigger. Oil has an impact on multiple factors in India which affect the bond market, including the current account deficit, inflation and interest rates. This could have a bearing on how much money is raised through bonds,” said Ramanathan Krishnamoorthy

However, the general long-term trend of lower bank-funding seems likely to stay. The share of bank-funding in resources flow to the commercial sector has generally shown a declining trend in recent times.

Domestic institutions traditionally have tended to invest in only highly-rated paper. However, now there is demand for lower rated paper as well because of schemes like credit opportunity funds, which have the mandate to go lower down the rating curve. The share of corporate bonds in overall funding is likely to go up in the future, said Pranav Haldea.  

“Banks cannot be expected to provide capital for all the funding needs of corporates,” he said.