Companies other than non-banking finance firms are raising funds through the debt market, via non-convertible debentures (NCDs) and commercial papers (CPs), to take advantage of favourable costs and increased investor appetite.
Rates at the shorter end of the tenor have eased 50-100 basis points (bps) since the beginning of the second quarter of this financial year. Improvement in liquidity conditions and increasing investor interest in debt market instruments have contributed to a fall in rates.
Companies have been issuing commercial papers (CPs) for funding needs of less than a year while NCDs are being offered for requirements of more than a year to two-three years.
| GROWING APPETITE The NCD pipeline from manufacturing and services companies | ||
| Company | Rating | Amount* |
| Tata Power | AA | 1,500 |
| Mittal-HPCL Pipelines | AA | 1,000 |
| Ultratech Cement | AAA | 250 |
| Torrent Power | AA | 200 |
| Tata Sky | AAA | 160 |
| Tube Investment Corp | AA | 100 |
| Himatsingka Seide | BBB | 20 |
| *Indicates the borrowing limit under given rating (Rs cr) Source: Rating agencies | ||
N S Venkatesh, head of treasury at IDBI Bank, said: “Higher rated companies are taking advantage of lesser costs at the shorter end (of tenor) and raising funds from the debt market, instead of drawing cash credit from banks.”
Debt is available at 8.5-9.5 per cent for three-six months from the money market. This is lower than the base rates of banks, which are above 10 per cent.
According to norms, banks are not permitted to lend at interest rates below their base rate. “Seeing this opportunity, companies are borrowing from the debt market instead of utilising their bank credit lines,” said Venkatesh, adding that these are mainly meant for funding working capital requirements.
Tata Power, Mittal-HPCL Pipelines, UltraTech Cement, Torrent Power and Tata Sky are expected to raise funds via NCDs. Tata Motors, Marico and IOC have been raising funds via CPs.
Ashok Sharma, general manager (treasury) with home textile major Himatsingka Seide, said investing in NCDs is a simple transaction. With challenges and risks of equity markets, people have been looking at investment avenues (such as NCDs) that are secure with better returns.
Banks are also investing directly in these instruments rather than going through the mutual fund route.
According to guidelines, banks are not permitted to invest more than 10 per cent of their net worth in liquid schemes of mutual funds. “There is enough liquidity in the system and banks are creating liquid mutual fund-type portfolio within treasuries by buying other banks’ certificates of deposit and CPs issued by their clients directly,” said the head of treasury at a large public sector bank. However, this is subject to company-specific exposure limits set by banks internally, the official added.
As on July 27, banks’ investments in CPs rose to Rs 21,550 crore from Rs 13,550 crore a year ago. Banks’ investments in bonds or debentures issued by public and private sector companies rose to Rs 1.23 lakh crore from Rs 92,200 crore in the same period, according to data from the Reserve Bank of India.
