NBFCs soon to savour masala bonds

Global credit rating agency Moody's Investors Service on Tuesday said Housing Development Finance Corporation Ltd's (HDFC) masala bond issue would pave the way for non-banking finance companies (NBFC) and government related issuers (GRI).

Masala bonds would find favour with NBFCs as the Reserve Bank of India (RBI) has issued a discussion paper proposing new limits for bank's lending to the finance companies.

These masala bonds – although denominated in Indian rupees – are listed on the international market and offered and settled in US dollars, providing easier access for foreign investors.

Indian housing finance major HDFC recently raised Rs 3,000 crore through such bonds. It is the first Indian company to issue such bonds and follows issuances by International Finance Corporation (IFC) and Asian Development Bank (ADB).

"We expect the market to deepen further with more issuers following HDFC Ltd.'s issuance," Alka Anbarasu, Moody's Vice President and Senior Analyst was quoted as saying in a statement.

"In addition, the Indian rupee has depreciated by about 5.3 per cent on a year-on-year basis, allaying some investor concerns about emerging market currency risk at a time when financing conditions have become less favorable for many developing countries," added Anbarasu.

The development of the masala bond market will help Indian NBFCs diversify their funding sources, which is their key credit weakness.

Moody's said that regulatory restrictions prevent NBFCs from accepting current and saving deposits.

Companies were therefore reliant on expensive and less granular funding from wholesale markets and institutional investors.

Furthermore, the Indian regulator recently issued a discussion paper proposing new limits on banks' lending to large corporates and NBFCs in order to reduce the system's single-name concentrations.

Given that banks are a key source of funding for these entities, these proposed limitations could become a significant constraint on their balance sheet growth, unless these NBFCs and large corporates manage to find alternative funding sources, said Moody's.

In September 2015, the RBI issued guidelines allowing Indian corporates, NBFCs, real estate investment trusts and infrastructure investment trusts to issue masala bonds.