Banks invested more in corporate debt in 2016-17 as the credit growth slowed to its lowest levels in six decades and deposits grew, especially after the demonetisation of high-value currency notes. Banks’ investments in bonds issued by corporates stood at Rs 3.55 lakh crore as on March 31, 2017, an increase of 25.4% from Rs 2.83 lakh crore at the beginning of FY17, according to the latest data from the Reserve Bank of India.
On an average, the 10-year benchmark bond yielded around 6.95% during the year, lower than an average coupon of 7.85% on the ‘AAA’ 10-year corporate bond. The coupon earned on investments in bonds, however, was lower than banks’ lending rates. The average marginal cost of funds-based lending rate (MCLR) was between 9.5% and 10.45% in 2016-17.
The credit growth slipped to 5% during the year from around 10% in the year before due to weak demand from corporates. Banks said the corporate credit growth is likely to revive only in the second half of the year. Rising non-performing assets have also made banks cautious in terms of lending. However, banks have seen their deposits swell, especially after the note ban. The excess liquidity in the banking system stands at around Rs 3.8 lakh crore.
Issuances in the corporate bond market grew more than 20% during the fiscal as lower costs weaned away borrowers from more expensive bank loans. Corporates and non-banking financial companies issued bonds worth Rs 7.02 lakh crore in the corporate bond market in the year to March 2017, data from markets regulator Sebi showed.
Capital raised through private placement of debt stood at Rs 6.40 lakh crore, up from Rs 4.58 lakh crore in the previous fiscal, according to Sebi data. In a recent report, PrimeDatabase said the share of funds mobilised by private sector entities was 47% in 2016-17, higher than 22% just six years ago. Bankers said they would continue to reshuffle their investments depending on how interests rates pan out in coming quarters.
The Reserve Bank of India has changed its stance to neutral from accommodative in February, but the recent low inflation data is likely to prompt it to hold its rates steady in coming months. “It is a question of how much risk a bank wants to take. If it wants to improve its profits, it will go for the high-risk, high-yield corporate bonds,” the general manager of treasury operations of a government-run bank said.