Companies raised a massive Rs 2.32 lakh crore from the domestic bond market during April-November 2014 compared with last year’s Rs 1.68 lakh crore, according to Prime Database, exceeding banks’ loan offtake, which is typically the primary fund raising avenue.
With AAA-rated corporates able to raise 10-year funds at 9.26%, many companies opted for the bond route. Banks, on other hand, were reluctant to lower their base rates and, consequently, lost out; the lowest base rate, that of State Bank of India, is 10%.
So far in December, Rs 10,000 crore has been raised through bonds, Bloomberg data show. If the issuance of commercial paper (CP) — short-term money market instruments having tenure of up to one year that are used to raise funds for working capital — is added, the total fund raised is close to Rs 3.5 lakh crore. During April-November, Rs 1.18 lakh crore was raised through CPs, according to data from the Reserve Bank of India. Several banks subscribe to CP although, at times, the interest rate on such paper is below the base rate. CP issuances have jumped 28% y-o-y while bond issuances have grown by 37% y-o-y.
Against this, banks disbursed Rs 2.62 lakh crore worth of loans to companies between April and December 14, RBI data show. Non-food credit growth has averaged 11% so far in 2014. The lack of project loan disbursements due to weak demand from corporates has been the key reason for low credit growth, bankers said.
The spread between corporate bond yields and government bonds yields has contracted in recent months. While there has been a secular fall in both corporate and government bond yields on the back of expectations that the Reserve Bank of India would soon start cutting policy rates, yields on government bonds have fallen by a bigger margin. For instance, the yield on the 10-year benchmark 8.40%, 2024 government bond is around 7.94% currently, 106 basis points down since April, while the yield on a AAA-rated corporate bond is around 8.54%, down 106 bps.
Bankers point out that unless base rates fall or spreads contract, bonds and CPs could remain a popular source of funding. “The economic activity hasn’t seen a pick-up and there is a lack of demand from companies, which is why non-food credit offtake remains low,” said Ranjan Dhawan, Bank of Baroda executive director, adding that AAA-rated companies are finding it possible to raise money below the base rate. While most banks have cut deposit rates, since they are sitting on liquidity, bankers say CP issuances could exceed loan offtake at least for the next one quarter.