By Shashank Nayar
Non-banking finance companies (NBFCs) are likely to be able to raise funds cheaper as yields for papers issued by AAA-rated NBFCs are the lowest since the past one year. Yields for 10-year paper issued by top-rated NBFCs have consistently been dropping in May to close at 8.56% on Thursday, the lowest since April 2018, according to data by FIMMDA.
Yields for the 10-year paper issued by top-rated NBFCs have fallen by 13 basis points (bps) so far in May. The average corporate bond spread —the difference between yields of corporate bonds and government bonds of the same tenure — for five-year paper of AAA-rated NBFCs has fallen to 102 basis points in May, the lowest since October 2018, according to data compiled by Bloomberg.
For instance, REC had issued a 10-year paper at 8.8% on May 14, while it issued a similar tenure bond on March 28 at a higher coupon rate of 8.97%. The spreads fell to 143 bps on May 14, against a spread of 165 bps in March.
Average yields in April were lower than the marginal cost of fund based lending rate (MCLR) – the rate below which a bank cannot lend. According to data published by the Reserve Bank of India (RBI), the system-wide average MCLR for scheduled commercial banks in April amounted to 8.74%, 9 bps higher than the average corporate bond yield.
Yields across ratings and maturities averaged at 8.65% in April 2019, according to a Care Ratings report. Dealers believe the moderation in the yield curve and spreads can be attributed to rate cuts conducted by the RBI and the possibility of further rate cuts by the central bank in the June monetary policy meet, coupled with a positive investor sentiment regarding the political scenario.
“We believe yields will remain at current levels without much movement as there are positive factors in play like low inflation numbers, falling crude oil prices and the BJP coming to power,” said Mahendra Jajoo, head – fixed income, Mirae Asset Global. He added that higher inflow into liquid funds – papers having maturity of below 91 days – has seen an uptick which is keeping yields and spreads down.