Retail NCD issuance may touch record high

The total retail non-convertible debenture issuance this year could surpass their previous high of Rs 423.83 bn, witnessed in 2013-14

Retail bond issuance this year could reach record high as non-bank finance companies (NBFCs) find it difficult to raise resources from their traditional funder banks.

According to Icra Ratings, the total retail non-convertible debenture (NCD) issuance this year could surpass their previous highs of Rs 423.83 billion witnessed in 2013-14. That year, public sector units issued tax-free bonds worth Rs 330 billion. Since then, there has been no tax-free bond issuance. This year, issuance of tax-free bonds has not been announced by the government. Still, the issuance in the first quarter itself should cross Rs 200 billion, much higher than last year’s Rs 47 billion, Icra said.

On a standalone basis, the NBFC group issued their highest-ever retail bonds during 2016-17, at Rs 293 billion, mainly in the first half. However, demonetisation in the second half created liquidity surplus, lower bond yields, and NBFCs were forced to seek private placements of debt securities to raise funds.

Historically, retail debt issuances from NBFCs have been concentrated during the second half of the financial year. But this year, companies have started tapping into the market from the first quarter itself. In May, DHFL raised retail bonds worth Rs 120 billion, and JM Financial Credit Solutions plans to raise up to Rs 7.5 billion. The coupons offered are over 9 per cent for these issues. 

The attractive yields may also result in better investor appetite amid limited increase in rates for bank deposits and volatile returns in debt and equity markets, Icra said in a report. 

“Reducing liquidity surplus and rising bond yields may require NBFCs to tap retail bond issuances during 2018-19 to meet their funding requirements, given the challenges of the banking sector and overseas borrowings,” the rating agency said.

The companies that are issuing retail bonds have good ratings (AA and above) and have strong regulatory oversight, which should give confidence to retail investors.

Banks have traditionally been the biggest fund suppliers to the NBFC group. With the hardening bond yields in the third quarter of 2017-18, the credit demand from NBFCs shifted to banking channels. As a result, credit outstanding towards NBFCs stood at Rs 4.96 trillion for banks end of 2017-18, against Rs 3.68 trillion as on December 22, 2017; sequentially higher by 34.8 per cent. 

However, “the ability to support the incremental growth may be limited for banks, given the challenges for public sector banks as well as the Reserve Bank of India’s (RBI’s) guidelines on large exposure framework and framework for enhancing credit supply for large borrowers requiring large borrowers to borrow from debt capital markets,” Icra said.

The RBI’s restrictive guidelines on concentration norms would mean that the incremental bank credit availability to NBFCs may be constrained.