Companies prefer bonds over bank credit due to slow monetary transmission

Tentative data from Prime Database shows that corporates raised Rs 72,075 cr in April-June this fiscal

Even as monetary transmission continues to be slow in the banking sector, companies are going ahead and raising funds by way of private placement of debt, a cheaper route than bank credit.

Tentative data from Prime Database shows that companies raised Rs 72,075 crore in April-June in FY14, compared to Rs 78,993 crore during the corresponding period in FY13.

Data by the Reserve Bank of India (RBI) show that the incremental credit in the April 5-June 14 period was Rs 11,648 crore, compared with Rs 21,092 crore in the corresponding period in the previous financial year.

“Companies are tapping the bond market because the base rate of banks continues to be over nine per cent due to which ‘AAA’-rated companies can raise funds from the bond market at around 8.50 per cent for a 10-year paper,” said Arvind Konar, head of fixed income, Almondz Global Securities.

Although RBI has cut the repo rate by 25 basis points in FY14, banks have been slow in cutting their lending rates. The repo rate currently stands at 7.25 per cent. While the Street expects further cuts in the repo rate in the current financial year, according to banks, a cut in the cash reserve ratio (CRR) makes more sense for monetary transmission. Currently, the CRR stands at four per cent of banks net demand and time liabilities.

However, the cost of borrowing by way of bonds is on the rise due to rising bond yields. This is because foreign institutional investors (FIIs) have been pulling out of domestic debt in a scenario when US treasuries are becoming attractive for them. “In the last one month the cost of borrowing by way of bonds for a ‘AAA’ rated corporate went up by 50 basis points,” said Konar.

It is expected that the cost of borrowing may go up further from here. “In a scenario when the rupee has been volatile against the dollar and FIIs are pulling out of domestic debt, the rate cuts will slow down due to which yields will go up further raising the cost of borrowing,” said Ramesh Kumar, senior vice-president (debt), Asit C Mehta Investment Interrmediates.

The Street also hopes that many companies may rush with their bond issuances in order to cut down on borrowing cost.

Earlier, many economists were expecting RBI to cut the repo rate further by 25 basis points in the first quarter review of the monetary policy on July 30.