With a record increase of Rs 11,746 crore over the preceding quarter, banks’ investments in private corporate bonds and debentures have hit an all-time high of Rs 1.54 lakh crore in the fortnight ended September 30, data released by the Reserve Bank of India (RBI) showed.
Moreover, fresh corporate debt issuance for the quarter ended September hit a record high of Rs 2.1 lakh crore. Total outstanding corporate debt, as a result, stood at a record Rs 21.94 lakh crore at the end of the second quarter of the current fiscal, Sebi data showed.
Incidentally, the surge in banks’ investment in corporate debt comes at a time when they are sitting on record deposits. As of September 30, total deposits in the banking system was at an all-time high of Rs 101.43 lakh crore, having increased by a record Rs 5.32 lakh crore over the preceding month.
Bankers said given the low demand for bank credit and adequate liquidity in the system, banks are finding higher-rated corporate bonds as the preferred destination for their surplus funds.
VS Narang, CFO of Bank of Baroda, said given the large difference between banks’ marginal cost of funds-based lending rates (MCLRs) and the yield on highly rated bonds, corporates are finding the bond market more lucrative. “Banks, in turn, are increasingly investing in these bonds given the low demand for credit from the industry and the fact that they still offer reasonably higher yields than G-Secs,” Narang said.
While an FIMMDA benchmark for AAA-rated 10-year corporate bond is currently at 7.59%, the same for AA-rated bonds is 8.16%. The yield on 10-year G-Secs, on the other hand, is 6.76%. As compared to this, the lowest one-year MCLR currently being offered by banks is at 9.05%.
Bank credit to the industry fell by 0.2% (y-o-y) in the month ended August 19, the RBI data revealed. This was is first contraction in bank credit to the industry since in at least a decade.
Interestingly, while non-banking financial companies have been dominating debt issuance in recent months, manufacturers jumped on the bandwagon in the second half of September.
First, M&M said it had approved raising Rs 475 crore via issuance of rated, listed, unsecured and redeemable NCDs at a coupon of 7.57%, and then Tata Steel said it has raised Rs 1,000 crore by issuing similar instruments at a coupon of 8.15%.