Firms continue to borrow more through bonds, CPs

Sebi data shows companies raised Rs 1.69 lakh cr in April-July period through private placement of corporate bonds

Indian companies continue to tap the commercial paper (CP) and corporate bond market for funding, due to the lower cost of borrowing when compared with bank credit and ample liquidity in the system.

Data from the Securities and Exchange Board of India (Sebi) shows companies raised Rs 1.69 lakh crore in the April-July period through private placement of corporate bonds. This was 215 per cent more than in the same period last year. And, Rs 1.66 lakh crore through CP compared with Rs 1.46 lakh crore in the same period last year, show data from Prime Database.

Bank credit growth in the fortnight ended July 24 grew 9.4 per cent, shows data from the Reserve Bank of India (RBI).

“Higher credit-rated securities are easily finding takers from fund houses. Slightly lower-rated CP issuances are finding takers from banks, as these banks had in the past lent them through their term loans. This way, the customer does not have to move to some other bank,” said Dwijendra Srivastava, chief investment officer (debt) at Sundaram Mutual Fund.

Banks have been slow in cutting their base rate (BR). Since the start of this financial year in April, they've reduced BRs by up to 30 basis points, while RBI has cut the repo rate, at which banks borrow from it, by 75 bps.

“Gradually, banks have been reducing their base rates and it will come down further as the cost of deposits comes down,” said Ashutosh Khajuria, executive director, Federal Bank.

According to issue arrangers, recent CP issuances include names like L&T FinCorp which raised three-month paper at 7.75 per cent and Jhajjar Power which raised two-month paper at 7.7 per cent. The BR of banks are higher than these.

To facilitate more participation in corporate bonds by standalone primary dealers, RBI has increased the exposure ceiling limits in respect of a single borrower or counter-party to 50 per cent of the latest audited Net Owned Funds (NOF), from 25 per cent earlier; for a group borrower, it has been increased to 65 per cent of the audited NOF from 40 per cent, only for investments in AAA-rated ones.

“This is positive for the corporate bond market. This will facilitate additional demand, due to which yields could fall,” said N S Venkatesh, executive director and head of treasury at IDBI Bank.