Mutual Funds remain cautious over NBFC debt instruments

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Published: September 17, 2019 3:53:19 AM

In August last year, mutual funds had invested around Rs 2.48 lakh crore in both CPs and corporate debt issued by NBFCs. Debt funds had an overall exposure of 13.6% towards NBFC debt in August 2019, as against 16.86% in August 2018.

Mutual Funds, NBFC, NBFC debt instruments, debt instruments, corporate debtMarket participants say demand for debt papers issued by NBFCs has fallen in the last one year after several defaults and downgrades in the sector.

Investors continue to remain cautious about non-banks. Data released by Sebi shows that exposure of debt mutual fund to the sector fell 20% year-on-year (y-o-y) in August to Rs 2 lakh crore. Market participants say demand for debt papers issued by NBFCs has fallen in the last one year after several defaults and downgrades in the sector.

Exposure of debt mutual funds to corporate debt papers issued by NBFCs – including floating rate bonds, non-convertible debentures and other debt instruments — was at a near two-year low in August at Rs 98,242.76 crore. Exposure to short-term debt instruments like commercial papers (CPs) was at a three-month low at Rs 1.01 lakh crore, according to Sebi data. In August last year, mutual funds had invested around Rs 2.48 lakh crore in both CPs and corporate debt issued by NBFCs. Debt funds had an overall exposure of 13.6% towards NBFC debt in August 2019, as against 16.86% in August 2018.

Dwijendra Srivastava, CIO – debt at Sundaram Asset Management Company, said: “In the last few months, we have seen rating downgrades and defaults of housing finance companies and non-banking finance companies (NBFCs) and that is one of the reasons MFs are staying away from them. Having said that there are well-managed NBFCs which are getting the money even in this market.”

The NBFC sector has been reeling under the pressure of tight liquidity and a crisis of confidence as there has been defaults and downgrades since infrastructure lender IL&FS defaulted on its debt obligations in July 2018. Most recently, wholesale non-bank Altico Capital defaulted on Rs 19.97 crore on external commercial borrowing to Mashreqbank PSC.

Even as NBFC debt papers have found fewer takers in August, the rate at which non-banks are able to raise debt has substantially fallen. According to a Care Ratings report, the average ‘AAA’ corporate bond yield for new NBFC issuances in August amounted to 8.37%, the lowest since December 2018, when it was at 8.95%. In addition, NBFCs could also raise short-term funds cheaper with average commercial paper yields at 6.17% in August, lower by nearly 150 bps y-o-y.

“The interest rate cut by the RBI and surplus liquidity in the banking system have also helped push yields lower. Corporate bond yields have fallen by 74 bps since April 2019 and that of CPs have fallen 137 bps,” according to Care ratings.

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