Retail bond issuances to touch all-time high in FY19: ICRA

Retail bond issuances in the current financial year are likely to surpass their previous high of Rs 42,383 crore witnessed in 2013-14, rating agency ICRA said in a report.

"Much of this is expected to come from the non-banking finance companies (NBFCs) which have typically accounted for about 40 per cent of the retail bond issuances during the financial years 2011-18 period; the balance being accounted by tax-free bonds," it said.

This trend is visible as retail bond issuances from NBFCs during Q1 FY2019 itself are likely to surpass about Rs 20,000 crore, much higher than about Rs 4,700 crore during FY18, it said.

"Typically, NBFCs have relied on diverse funding sources like banks, commercial papers, NCDs (retail and private placements), overseas issuances and retail fixed deposits for their funding requirements," it said.

However, tighter liquidity conditions, rising bond yields and weak capital position of public sector banks (PSBs) that enjoy a dominant 70 per cent share of bank credit is likely to increase retail bond issuances by NBFCs during the current fiscal, it said.

Overseas funding despite RBI's relaxed norms is not a viable option due to hardening global yields and depreciating Indian rupee leading to higher hedging premiums, it said.

"In case of rupee denominated overseas borrowings, investors may want higher returns to offset the currency risks. Therefore, in such a scenario, to support their credit growth, NBFCs may have to meet part of their funding requirements through retail bond issuances during the year," it said.

As higher credit growth is usually witnessed during the second half of the financial year, due to relatively tighter liquidity conditions and consequently higher interest rates; historically retail debt issuances from NBFCs have been concentrated during second half of the financial year, it said.

"With the hardening bond yields from Q3 FY2018 the credit demand from NBFCs shifted to banking channel, which is reflected in growth of bank credit outstanding towards NBFCs to Rs 4.96 lakh crore as on March 30, 2018 as against Rs 3.68 lakh crore as on December 22, 2017; sequentially higher by 34.8 per cent," it said.

However, this trend is unlikely to sustain given the numerous challenges PSBs are currently grappling with and, the tighter RBI guidelines on large exposure framework, it said.

It is likely that funding sources may undergo a change and NBFCs may tap retail investors through higher fixed deposit rates as well as public issue of NCDs as Mutual Fund, one of the key investor segments, could likely see moderation in flows in a rising interest rate regime, it added.