Given that yields on debt instruments have remained around 150-200 basis points below bank lending rates this fiscal year, private sector companies have noticeably moved to the money market to meet their borrowing needs instead of going to banks in an effort to bring down their cost of funds.
Since the beginning of this fiscal year, the 10-year benchmark yield has fallen by approximately 60 basis points to trade below the 7% mark for the first time since 2009. On Wednesday, the benchmark yield closed at 6.87%. Similarly, corporate bond yields and commercial paper yields have also tanked by around 90 bps and 170 bps respectively. Currently, a AAA-rated corporate can raise funds at a rate of around 7.55% for a tenure of 10 years through corporate bonds and at 6.98% for a period of 3 months through commercial paper.
In the current financial year so far, private sector players have raised over R1.71 lakh crore through private placements of corporate bonds, as against R1.69 lakh crore in the same period last year. Commercial paper (CP) issuances have also surged over the last one year, with corporates having raised R6.78 lakh crore since the beginning of the financial year through this route, over 33% more than in the same period a year ago.
During the period under review, outstanding bank credit to industry rose a mere 0.5% to R26.36 lakh crore, indicating a change in preferred source of funds especially for large corporates.
“There is a lot of disparity between bank lending rates and money market rates. The new 10-year has been priced under 7% and that I think is a major indicator of the current bias. Liquidity in the system is also looking very good, and that has helped in keeping the market lucrative for corporates looking to raise short-term and long-term funds,” Karthik Srinivasan, senior vice-president at ICRA, told FE. He added that recent steps taken by the Reserve Bank of India (RBI) to develop the corporate bond market has also given an impetus to debt market investment.
In August, the RBI came out with new measures aimed at increasing participation in the corporate bond market in India. These measures, among others, included allowing banks to raise additional tier-I and tier-II capital through masala bond issuances in overseas markets. To give a boost to liquidity, the RBI further said that it would now accept corporate bonds as collateral at its liquidity adjustment facility (LAF) window, which allows banks to borrow from the RBI for a short term.
“…over the long term, the corporate bond market can disintermediate banks and reduce their margins. However, it will also improve lower-rated corporates and small and medium enterprises’ access to funds, which so far has been restricted only to large, well-rated corporates,” HSBC Securities and Capital Markets said in a report after the announcement of these measures.
Along with falling money market rates and a relative stagnancy in bank lending rates, another possible factor for the rise in inflows into corporate bonds and CPs is a decline in investment in bank instruments like certificates of deposit (CD). Banks have been asked to lower their dependency on wholesale funds and this has resulted in a slowing down of fresh CD issuances.
“This is a trend that is here to stay. If you look at any major financial market in the world, in order to get there it is very necessary for us to move more and more towards market financing. And the RBI seems to think so too, judging by the measures it has announced recently,” Suyash Choudhary, head – fixed income at IDFC Mutual Fund told FE.
Choudhary also spoke about how new categories of investors and investment have also helped increase volume in the debt market. “If you remember, credit opportunity investments did not exist around 6-7 years ago. Now it is a R80,000-crore market. I think as we move forward, we will see more and more participation in the debt market and it is a long-term positive for the economy,” he said.