Govt's lower-than-expected borrowing will be positive for PSBs and NBFCs

The government’s lower-than-expected borrowing programme for the first half of FY19 (H1FY19, or April-September 2018) will be positive for public sector banks (PSBs) and non-banking finance companies (NBFCs). Not surprising then, the Nifty PSU Bank Index surged about 3 per cent on Tuesday, while shares of some NBFCs were up over 1 per cent.

Investors reacted positively on account of expected benefits for these companies owing to a 29-basis point-(bps) decline in 10-year government bond (gilts) yields at 7.33 per cent.

This drop in yields indicates lower provisioning burden for PSBs in the January-March 2018  quarter (Q4) as the market value of gilts (held by banks in the available-for-sale segment), accounting for a major portion of their investment book, will increase. There is an inverse relationship between yields and the market value of bonds and banks have to provide for any erosion in gilts’ market value (mark-to-market losses) on a quarterly basis.

Earlier, when yields had moved up, analysts had estimated a mark-to-market loss of over ~150 billion for the banking sector, mainly PSBs. Now, as yields are almost at end-December 2017 levels, market value of gilts should move closer to levels seen at the end of Q3. “If the yields remain at the current level (around 7.3 per cent) till the end of this quarter, PSBs would not be required to make any provisioning for mark-to-market losses,” said Karthik Srinivasan, group head-financial sectors rating, at Icra. 

In Q3, too, PSBs had to make significant provisions (hence mark-to-market losses) due to a sharp rise in yields.

Not only PSBs, but NBFCs should also benefit from the decline in yields, but in terms of margins. For instance, Housing Development Finance Corporation, LIC Housing, and Indiabulls Housing borrow 56-78 per cent of their total external funds from the debenture (bond) and securities market.

“The fall in government bond yield will be followed by corporate bond market. So, to that extent (29 bps), borrowing cost would go down. As a result, margins are expected to improve for retail NBFCs in H1FY19,” Srinivasan said.

But, experts are sceptical over gains for NBFCs in term of credit growth. “A small dip in lending rates (expected to be in line with the yield fall) would not make a significant improvement in retail 

credit growth of NBFCs,” said G Chokkalingam, founder and managing director, Equinomics Research and Advisory.

There are reasons for investors to take the news with a bit of caution as the trend could change in the second half of FY19 (October 2018-March 2019) as an expected increase in government spending could push up the yields again. “Higher reliance on borrowing in H2FY19, that is over 52 per cent, and increased private spending are likely to lead to a crowding-out effect. We expect the yields to harden further in H2FY19,” analysts at Emkay Research said.