Companies and non-bank financial companies (NBFC) have together mopped up R1.34 lakh crore from the bond markets in the three months to June.
While it has been cheaper to borrow via bonds for some now, a fall in yields by about 60 basis points over the past six months has made it even more attractive to do so.
As Jayesh Mehta, managing director and country treasurer for India, Bank of America Merrill Lynch, points out, yields on corporate bonds have fallen following the drop in the yields of the benchmark bond to levels of 7.3%. “The yields have fallen but the spreads, over the treasury, remain more or less where they were six months back, “Mehta observed adding that at the long end they have actually widened.
In FY16, borrowings from the corporate bond market amounted to Rs 4.58 lakh crore, higher than the Rs 4.04 lakh crore in FY15.
With more players coming into the corporate bond market, liquidity has risen sharply in the past few years. Ajay Manglunia, executive vice-president, Edelweiss Financial Services, points out the average daily trading volumes have shot up to anywhere between Rs 10,000 crore and Rs 15,000 crore compared with just Rs 500-1,000 crore three years back. “Even banks are trading in the corporate bond markets these days,” Manglunia observes.
Companies and non-bank financial companies have been tapping the bond markets rather than approaching banks because it’s cheaper to do so. With yields having fallen by 60 basis points over the past six months or so, a AAA corporate can now borrow at 7.6-7.7% compared with 8.1% levels earlier. Ashutosh Khajuria, CFO and President, Treasury, Federal Bank observed that new issuances were attracting lower yields. “Benchmark yields have come down to around 7.3% levels, partly due to buying by foreign portfolio investors who have bought $640 million worth of G-secs in July so far,” Khajuria pointed out.
Outstanding corporate bonds as on June 30 stood at R20.63 lakh crore, an increase of R2.74 lakh crore over June, 30, 2015, data released by the Securities and Exchange Board of India revealed. According to Reserve Bank of India data, outstanding bank credit to industry as on May 27 stood at R26.63 lakh crore, only 1% higher than R26.38 lakh crore outstanding as on May 29 last year.
Shashikant Rathi, executive vice-president and head investments, ALM and capital markets at Axis Bank, believes the shift to the bond market has been felt by most banks. “By and large those companies which enjoy a rating above AA- have moved to the corporate bond market. This is because of the difference between yields on corporate bonds and the lending rates of banks remains high,” Rathi pointed out recently.
While banks have moved from a base rate to marginal cost of funds-based lending rate (MCLR), the shift hasn’t helped bridge the gap between corporate bond yields and bank lending rates by significantly. State Bank of India’s (SBI) base rate before the shift to MCLR was 9.30%, only 10 basis points higher than its current one-year MCLR, which is 9.20%.
However, despite the disparity in the cost of borrowing, experts maintain that only highly rated corporates can tap the bond market. “The only companies which can tap the debt markets for funds are the higher rated ones,” Udit Kariwala, analyst at India Ratings, said.
