NBFCs, including housing finance companies (HFCs), have been diversifying their funding sources as a way to reduce their dependence on financing from banks.
"As part of this strategy, these companies are actively engaged in securitisation. In this context, covered bonds could provide an additional source of funding," Moody's said in a report.
It said, covered bonds in India could provide an additional funding option for financial institutions at a time when high economic growth is driving a significant uptick in retail lending by both retail-oriented banks and non-bank finance companies (NBFCs).
The cost of funding for HFCs in India is significantly higher than banks because they do not have access to retail deposits, which means they are lending at thin margins.
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Also, the majority of HFC funding is on a fixed rate of interest, whereas lending is on a floating interest rate basis, which poses an interest rate risk in a declining interest rate scenario, Moody's said.
"Yields on Asian and global covered bonds tend to be lower than senior unsecured bonds. If this spread differential were to be replicated for Indian covered bond issuers, it could help housing finance companies that issue covered bonds to better manage interest rate risk," it added.
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