Non-convertible debentures new fund route for NBFCs

Experts claim debentures are more stable than commercial papers

In a bid to meet working capital requirements more non-banking financial companies (NBFCs) are opting for retail issue of non-convertible debentures (NCDs) rather than commercial papers, as this helps them broaden the investor base.

Also, NCDs are considered a more stable source of funding.

Muthoot Finance is planning to raise Rs 400 crore by a public issue of bonds in order to meet its working capital needs. "Going for retail NCDs over commercial papers helps us broaden the investors base. We typically prefer NCDs of a tenure of 400 days to six-and-a-half years. Even now, we are planning to raise retail NCDs for up to Rs 400 crore of tenure of 400 days to six-and-a-half years at coupon rate of 10 per cent to 11.25 per cent," said George Alexander Muthoot, managing director, Muthoot Finance.

Muthoot also said the company might do another retail NCD issue in the final quarter of the financial year.

IFCI is another company in which the public issue of bonds is currently open. The issue had closed on November 21 and IFCI do another issue of bonds in the next one year.

"The back-up lines of funding from banks are not always available due to which retail NCDs are better. Besides, retail NCDs can be raised even for longer tenures," said Malay Mukherjee, CEO and managing director, IFCI.

The cost of retail NCDs turns out to be higher and these NBFCs are willing to pay that for the advantages attached to it.

"Rather than depending on banking channels, which are seasonal in nature, companies are getting away from that. These companies are diversifying their borrower base. More companies may go for retail NCDs rather than CPs. Retail NCDs may not be cheaper but they are a stable source of funding for companies. Retail NCDs of tenures of one year turns out to be 50-75 basis points higher than CPs," said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.

However, experts believe most of these retail NCD issuances may pick up next year as the bias is towards a fall in interest rates.

That would make it cheaper for NBFCs to raise funds through this route. With inflation expected to soften, the Reserve Bank of India may start cutting interest rates as a result of which retail NCDs will be cheaper.

"The domestic bond market continues to grow and companies are better placed now to tap both retail and the mutual fund investor base. The growing size of the mutual fund industry provides a good opportunity to corporates to diversify their funding source," said Sanjeev Lall, managing director (head institutional banking group and branches) - India at DBS Bank.