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Though the central government and the Reserve Bank of India have offered incentives for raising long-term bonds to fund infrastructure and affordable housing, investors' appetite for such instruments from insurance companies and pension funds seem limited.
The reasons include the unsecured nature of these papers and current ratings of Indian banks.
RBI has said funds raised via these bonds will not be included in the computation of net demand and time liabilities; hence, exempted from the cash reserve ratio and statutory liquidity ratio caps, if those are used for financing core sector projects and affordable housing loans. These bonds will be of a minimum maturity of seven years.
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Ajay Manglunia, senior vice-president (fixed income), Edel-weiss Securities, said: "These bonds are unsecured in nature, due to which we need to see how much appetite comes from the investors' side. These bonds will be of longer tenure and the de-mand for long-term bonds are not very high. These bonds might attract the interest of insurance and pension fund firms. But, the demand wi-ll be for bonds issued by AAA-rated banks. Banks with lower credit ratings will find it difficult to raise funds through these bonds.”
In a notification issued on Tuesday, RBI observed that issuances of long-term bonds for funding infrastructure ‘has not picked up at all’.
According to an estimate by rating agency Icra, the potential of long-term bond issuances by banks is seen at Rs 2.7-3.5 lakh crore for FY15, and then increasing significantly to Rs 24-29 lakh crore for the six-year period of FY15-20. Icra said insurance companies, pension and provident funds, foreign institutional investors (FIIs) and retail investors could be key investors in these bonds but added the cushion available with insurance companies and pension funds for investments in corporate bonds was estimated at less than Rs 1 lakh crore. This, it said, might be a constraining factor for long-term bond issuances by banks.
Insurance firms say they would have the appetite for investing in long-term infra bonds, even up to Rs 100 crore in the initial stages. The fixed income head of a private life insurance company said though RBI has said these would have a minimum maturity of seven years, insurance companies would look at bonds of a 10-30 year duration, since they have a long-term liability in insurance policies.
"About 75-80 per cent of the total product portfolio in the industry is of traditional products that usually have 10-15 years duration. Hence, the sector is open to long-tenure bonds issued by banks with a strong credit record," said the chief investment officer (debt) of a mid-size private insurance company. However, they'd first wait for the bigger insurers, with a larger chunk of assets.
On the interest rate, insurers said they would chose in line with the asset-liability requirement of individual firms. An official explained if interest rates were elevated and there was an expectation of it going down, a fixed rate would be preferred. If there was a rise expected, a floating rate would be chosen.
Badrish Kulhalli, head of fixed income at HDFC Life, explained these instruments would preferably be on a fixed rate of interest, since that is the case with infra projects. Also, as the project risks would be retained by banks, the sector would be able to make a long-term investment.
An absence of good papers had also forced insurers to stay away from the corporate bond market. However, Nirakar Pradhan, chief investment officer of Future Generali India Life Insurance, felt these instruments would be a good bet and allow insurers to invest in dynamic structures of infra bonds.
Icra said the FII limit of $51 billion for corporate debt was only around 40 per cent utilised as on July 15, leaving sufficient space for more investment in these bonds. It said the new guideline could also facilitate the development of a fixed interest rate market for infrastructure, as well as the affordable housing segment, as the Indian bond market is largely a fixed interest rate segment.
This, it said, would encourage banks to offer fixed rate loan products to keep interest rate risk under control, though the regulation allows issuance of bonds with fixed or floating rates of interest.
