The current month is likely to see a spate of non-convertible debenture (NCD) offerings being launched by non-banking financial companies (NBFCs), which are looking to take advantage of the interest rate spreads and meet their immediate funding needs.
The R500-crore NCD issue of India Infoline Finance (IIFL), an NBFC subsidiary of India Infoline, will open on September 5. Shriram City Union Finance, Religare Finvest and Muthoot Finance have also received approval from market regulator Sebi to raise R500 crore each through NCD issues. Together, these issues will total more than R2,000 crore.
?Most NBFCs are looking at liquidity at this point in time to meet the huge demand for loans from Tier-I borrowers,? said Anil Rego, founder & CEO, Right Horizons. NBFCs are finding it easier and cheaper to raise money from the public rather than through banks or private deals.
According to Raghvendra Nath, MD, Ladderup Wealth Management, firms in the financing business are in constant need of funds and are always looking at cheaper source of money.
?Retail investors are attracted to these issues because of the higher yields they offer compared with banks,? said Nath.
While banks offer 9-9.5% for a five-year period, NCDs of a similar tenure can offer between 10-12%. Among the current crop of issues, IIFL is offering a coupon rate of 12.75% on six-year bonds, significantly higher than the 11.4% offered by Shiram Transport Finance in July.
While investors will benefit from the high interest rates on offer, the NBFCs are likely to earn a healthy spread as well.
?Because of the tightness in liquidity in the market, NBFCs are likely to lend at anywhere between 15-18%, ensuring a reasonable spread to the rate being offered to investors,? said Rego. Spreads, however, may differ depending on the business the NBFC operates in.
The NCDs of IIFL, Religare Finvest and Muthoot Finance have been rated AA- Stable by both Icra and Crisil, which indicates a high degree of safety regarding timely servicing of financial obligations. However, market watchers advise investors to exercise caution before investing in NCDs and keep an eye on the credit quality of the papers.
?Investment in NCDs should not exceed 15% of an investor?s debt portfolio,? said Rego.
According to Nath, investors should look at investing in 5-6 NCDs to avoid the risk of single-party exposure. Unsecured debentures have an additional risk as they are not backed by security in the form of land or other assets.