Banks lose out to bonds & CP as firms look to borrow cheap

Written by Aparna Iyer | Mumbai | Updated: Sep 29 2014, 07:24am hrs
BanksThe growth in loans from banks has been subdued dropping off to a five-year low of sub-10%. Reuters
With banks reluctant to drop loan rates, corporates are opting to raise money through other routes such as commercial paper (CP) or privately placed bonds. Money mopped up through the relatively shorter- term CP typically issued for periods of up to one year has seen an increase of 35% year on year between January-August 2014. The growth in loans from banks, meanwhile, has been subdued dropping off to a five-year low of sub-10%.

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Both CPs and bonds work out to be cheaper for companies. Corporates have sourced around R3 lakh crore by privately placing bonds and another R21,000 crore through public issuances in 2014 so far. Thats not surprising since the base rates of most public sector banks are in the 10.00-10.25% band while an AAA-rated firm can raise ten-year bonds at a cost of 9.40-9.60%.

Pradeep Kumar, managing director at State Bank of India (SBI), confirms there has been a flight of companies from the loan market to the bond market mainly because of the difference in the yields.

Kumar points out that one reason companies arent borrowing from banks is that theyre looking for working capital rather than project finance. There is no big demand for capital expenditure, just some from existing power projects where there has been a cost overrun, Kumar said. With project sanctions having dropped off by 32% in FY14, demand for project loans is expected to stay subdued for another six months or so. Rakesh Sethi, chairman and managing director of Allahabad Bank, believes loan growth is unlikely to exceed 10% in the rest of the year.

Banks are also seeing repayments from some non-banking finance companies (NBFCs) which have been able to raise money through bonds. As Ajay Manglunia, head, debt capital markets at Edelweiss Financial Services says, nearly 70% of the issuances in the rupee bond markets have been made by NBFCs which want to refinance costlier loans. The first eight months of 2014 have seen a huge 40% year-on-year jump in rupee bond issuances.

Companies raised approximately Rs 14 lakh crore across routes--bank loans, bonds, equity and overseas borrowings--between January and August, a 13% year-on-year growth, but slower than the 16% growth seen in the corresponding period of 2013. Borrowings from the overseas markets have fallen by 11%, Reserve Bank of India (RBI) data shows, another indication of firms unwillingness to borrow for longer tenures. Also, only a small clutch of companies has been able to mop up money from the equity market just Rs 34,128 crore was picked up in the first eight months of 2014, 17% lower than the corresponding period of 2013, data from Prime database shows. Thats despite India being the best performing market worldwide for the better part of the year with the benchmark indices scaling several new peaks; the Sensex has hit a high of 27,354.99, while the broader Nifty has touched 8180.2. Fund raising from offshore global depository receipts and American depository receipts was nil.