Companies are increasingly turning to the bond and commercial paper markets to source debt at lower interest rates. Between April and July 2015, corporate bond placements increased by a whopping 215 per cent to Rs 1.69 lakh crore, compared to what was placed in the same period in 2014. Another Rs 1.66 lakh crore was raised via Commercial Paper (CP) in that four-month period. An estimated Rs 3.2 lakh crore of CP is currently outstanding. Most of that debt was raised at rates between 7.75 per cent and nine per cent - lower than the base rates of banks. Banks have been unable to service credit demand because their structural rigidities and weak balance sheets prevent them making deep rate cuts. The data make it apparent that there has indeed been some revival in commercial activity, and that there is genuine demand for credit at lower interest rates. The increased activity in CP and corporate bonds also helps to explain some of the dichotomy between high GDP growth projections and low bank credit. It is also clear that there is ample liquidity. Debt mutual funds and even banks have subscribed to these instruments.
The banking sector is suffering from a contraction in credit demand and an expansion in non-performing assets (NPAs). Between April and June 2015, bank credit growth hit a multi-year low of 9.2 per cent for the 29 banks which have declared results so far. Provisioning for NPAs led to a 10 per cent fall in profits. Most of the sticky loans were disbursed by public sector banks. The dodgy exposure lies in stalled infrastructure projects, and in loss-making power, construction, and steel companies. The Reserve Bank of India (RBI) has cut rates thrice in 2015, pulling the benchmark repurchase rate (or repo) down to 7.25 per cent. Bank base rates remain above nine per cent, however, because those cuts have not been fully transmitted. But the benchmark 10-year G-Sec is trading at 7.8 per cent. Companies with AAA-rating can place debt at small premiums over the benchmark rates; housing finance major HDFC recently placed a CP issue of three months tenure at 7.85 per cent.
Another factor is that bond issues have become easier in regulatory terms. The RBI has increased the exposure ceiling limits for single and group borrowers, and also for counter-parties, quite significantly. Bonds are efficient instruments when it comes to raising debt for long-gestation projects. Unlike in the case of vanilla long-term debt, there are few problems with asset-liability mismatches in long-tenure bonds of say 10-15 years or more. However, the current tenures are mostly at under five years. Unlike bonds, CP is unsecured against default. Most CP tenures are three months or less, indicating working capital is being raised by this route. Banks need to clean up balance sheets and reduce other expenses to price loans competitively. Until such time as that happens, India Inc will raise more debt by these alternative avenues. Economy watchers will also have to make allowances for the fact that bank credit can only provide a partial and perhaps, misleading view of economic activity under the current circumstances.
