Retail bond issue down 78% in FY13 as loan demand declines

Lower loan demand in a slowing economy, coupled with softening of interest rates, has resulted in a sharp decline in retail bond issuances in the current financial year.

According to data from the Securities and Exchange Board of India, retail bonds, primarily issued by non-banking finance companies (NBFCs), dropped 78 per cent to Rs 7,818 crore till January in 2012-13. In 2011-12, non-banking financial companies (NBFCs) and infrastructure developers and financiers such as the National Highways Authority of India and Housing & Urban Development Corporation had raised Rs 35,611 crore by issuing bonds to retail investors.

In FY13, many companies came up with the first tranche of tax-free bond issuances but these failed to get a good response compared with last year, as the coupon rate on these was lower than in 2011-12. The 10-year benchmark government bond yield is the measure for determining the coupon rate of these tax-free bonds. The yield has dropped 95 basis points (bps) from April 2012 till now.

When the first tranche of issues started coming (since December), the yield on the 10-year benchmark bond was already down about 60 bps since the beginning of the financial year.

"Investors were not interested as the coupon rate came down. In FY12, the response was good because the coupon rates were attractive and the amount of issuances were also lower, compared with FY13," said an issue arranger.

For the current year, the government had allowed state-owned financial institutions to raise about Rs 60,000 crore from tax-free bonds against Rs 30,000 crore in 2011-12. These companies have now announced a second tranche, saying the first one was not very successful. "We have to price the tax-free bond at a rate keeping in mind the government bond yield. Yields have been falling and this affected the amount mobilised by tax-free bond issuances," said a senior official of an NBFC which had issued one recently.

NBFCs which issued retail bonds every year, such as Shriram Transport Finance, Shriram City Union Finance and Religare Finvest had reduced their offerings. Issue arrangers say this was because of the economic slowdown, due to which their need for funds had come down.

"Due to the economic conditions, no major issues had hit the market. Irrespective of that, if the retail investors segment has to grow, good company names should come to the market continuously. You have the liquidity of money available in the household sector but the liquidity of instruments are not there, due to which investments are going towards gold," said Ramesh Kumar, senior vice-president (debt), Asit C Mehta Investment Interrmediates.