Easier bond market rules for FPI cheer public-sector bank stocks

Bond yields could slip, easing mark-to-market provisioning pain for banks; housing finance companies can access foreign borrowings

Public-sector banks' (PSBs) stocks were up on Monday, after the Reserve Bank of India (RBI) eased rules for foreign portfolio investors (FPI) to invest in government and corporate debt, late last week. The move, whch is the second by the regulator in less than two months, will help the bad loan-hit public-sector banks (PSBs) by easing their mark-to-market provisioning pain. After giving a leeway to PSBs to spread mark-to-market provisions from the October-December 2017 quarter equally in four quarters, the regulator liberalised some rules for investments by FPIs in the debt market, which would help push down bond yields.

While the RBI softened the minimum three-year maturity clause for FPI investment to less than one year in the case of government bonds (G-sec) and to one year in case of corporate bonds (FPIs were required to invest in G-sec and corporate bonds with minimum maturity of three years), the maximum permissible FPI investment limit, in any G-sec, too, was revised upward from 20 per cent earlier to 30 per cent.

What cheered investors, is the expected benefits to PSBs in terms of mark-to-market provisioning in the April-June 2018 quarter, due to a likely fall in bond yields in the wake of softening of FPI bond investment rules. PSBs invest heavily in G-sec and are mandated to keep aside some portion of operating profits for any erosion in the market value of G-sec, under the available for sale segment (AFS), on a quarterly basis.

More impact would be on short-tenure bond yields. “With the softening of three-year maturity clause to less than one year, yields on short-tenure bonds would fall more than the long-term ones (which is due to increase in the cap),” says Karthik Srinivasan, head, financial sector ratings at Icra.

Yields on 10-year G-sec, which rose by around 37 basis points to 7.77 per cent since the start of FY19, are likely to come back to the March-end level of 7.4 per cent, Srinivasan added. If the yields remain at 7.4 per cent, it will be an another big relief to PSBs, many of whom are under pressure to provide for bad loans and mark-to-market losses. In the past two quarters, PSBs got hit by elevated level of yields. The government and the regulator, however have tried to lower PSBs' pain by postponing the debt issuance programme for April-September 2018 period to the second half of 2018-19, and allowing PSBs to spread the mark-to-market provisions as mentioned above.

Moreover, RBI also surprised housing finance companies (HFCs), which are regulated by National Housing Bank, by allowing them access to foreign borrowings i.e. external commercial borrowing (ECB). This will help HFCs to diversify their borrowing mix and experts believe this move is positive for HFCs. It was then quite obvious that stocks of HFCs such as LIC Housing, Housing Development Finance Corporation and Indiabulls Housing Finance, gained up to two per cent in the Monday’s trading. 

However, this may not help HFCs in terms of cost of funds as they are mandated to hedge 100 per cent exposure to these ECBs, which would mean additional costs. “Overall cost of 100 per cent hedged-ECBs would be more than the domestically borrowed funds to some extent,” Srinivasan opined.