Investors opt for state development loans

They also have better credit quality than corporate bonds

Investors are investing more in state development loans (SDL), as there were no fresh corporate bonds this year. According to investors, they were investing 20 per cent of their investment corpus in SDLs, compared with 10 per cent last year.

Typically, corporate bond issuances are poor in the first half of the financial year and pick up in the second half. The indicative quantum of total market borrowings by state governments and the Union Territory of Puducherry, for the April-June quarter, was expected to be in the range of Rs 45,000 crore to Rs 50,000 crore, according to the Reserve Bank of India (RBI). “The amount will be raised through auction of SDLs generally on the second and fourth Tuesdays of the month,” said RBI.

“Since there is no fresh issuance of corporate bonds, investors are investing in SDLs. SDLs also have better credit quality than corporate bonds. The yields on SDLs are higher than government bonds. The yield on the 10-year SDL is between 9.35 and 9.40 per cent,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.

Though the yield on SDLs is higher than government bonds, the latter are safer. The yield on the 10-year government bond is currently at 8.83 per cent. However, in SDLs liquidity is very poor due to which SDLs are seen as buy-and-hold instruments.

Banks, pension funds and insurance companies primarily invest in SDLs.

The insurance companies mobilise premiums in March, which typically gets invested in instruments like government securities, SDL and corporate bonds in April.

As far as banks are concerned, the deposit growth is higher than the credit growth due to which even they are investing in SDLs. “Banks are investing in SDLs because credit offtake is slow currently, while deposit growth of the banking system is ahead of credit growth and fresh issuances of corporate bonds are not coming up. So we are looking at government bonds and SDLs though majority of the investments are still in government bonds,” said Anoop Verma, vice-president for treasury at Development Credit Bank.

The credit growth of the bank system is sluggish due to slow economic growth. As per latest RBI data, in the fortnight ended April 18, bank credit grew by 14.29 per cent year-on-year, while deposits grew by 15.31 per cent year-on-year.