NBFCs turn to markets due to high bank lending rates

Borrow more from debt market in the current fiscal than from banks

Non-Banking Finance Companies (NBFCs) are borrowing more from the debt market in the current fiscal rather than funding their needs from banks due to high lending rates. In fact, few NBFCs have changed their funding mix, which was earlier more skewed towards bank borrowings.

Latest data from the Reserve Bank of India (RBI) pertaining to sectoral deployment of credit shows that credit to NBFCs increased by 3.3% in December 2014 as compared to an increase of 15.1% in December 2013.

“Our cost of raising funds too has been coming down in the last few months with a significant shift in the mix between bank funding and bond market. Therefore, if we consider the overall borrowing for the company, around 45% are from banks and rest from the market. Few months ago it was the reverse,” said YM Deosthalee, chairman and managing director, L&T Finance Holdings.

Housing Development Finance Corporation (HDFC) has reduced its dependence on term loans from banks. It is tapping debentures and securities instead. 

“If you were to look at it on a balance sheet basis then deposits would now account for about 33% of my total funds, term loans from banks will account for about 11% and debentures, securities and bonds all of that put together will account for 56%,” said Keiki Mistry, vice chairman and CEO of HDFC. As per the investors presentation for March 2014, term loans comprised of 18% while share of debentures and securities was 51%. 

Latest RBI data shows that for the week ending January 24 the base rate or the minimum rate at which banks lend was in the range of 10 to 10.25% while from the bond market borrowings can be done at rates below 10% depending upon the credit rating of the NBFC.

“Today if HDFC borrows from the market the coupon rate will typically be around 8.50-8.55% and L&T Finance may have to pay coupon rate of 8.80-8.85% for 2-5 tenure of borrowing by way of private placement of bonds. NBFC may continue to borrow more from the market than banks because of the rate being cheaper. There is investor appetite from FIIs, mutual funds and insurance companies,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.

For few NBFCs, the borrowings in general have shrunk due to economic slowdown. “The incremental requirement for funds were not that much. Our total borrowing as of 9 months in current fiscal was Rs 19,330 crore. For the previous fiscal in the same period, it was Rs 20,410 crore as on December 31, 2013,” said Oommen K Mammen, CFO of Muthoot Finance.