As the festival season approaches, a surge of non-banking financial companies (NBFCs) is flocking to the debt capital markets to meet the rising credit demands, driven by a slowdown in traditional bank funding. The shift towards bonds and commercial papers (CPs) has become increasingly evident as NBFCs seek alternative funding sources amidst tighter banking conditions.
On Tuesday, several prominent NBFCs made headlines with significant bond issuances. Aptus Value Housing Finance secured ₹300 crore through bonds maturing in five years at an interest rate of 8.75%. Meanwhile, ICICI Home Finance Company raised a combined ₹575 crore in two separate tranches—₹275 crore at an interest rate of 7.94% and ₹300 crore at 7.95%, with maturities spanning three and five years. The bids for ICICI Home Finance’s offerings are expected to close by Thursday. Additionally, InCred Financial Services successfully raised ₹215 crore.
Since August 1, NBFCs have collectively raised a staggering ₹73,820 crore via corporate bonds, according to PRIME Database. This notable uptick in bond issuances underscores the sector’s shift towards capital markets as a primary source of funding.
The impetus behind this move is largely attributed to recent changes in regulatory policies and their impact on bank lending. In November 2023, the Reserve Bank of India (RBI) increased the risk weight for loans to NBFCs, prompting banks to raise interest rates and adopt more selective lending practices. This regulatory shift has driven companies to explore alternative funding options such as commercial papers and bonds.
Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap LLP, elaborates on the situation: “Following the RBI’s decision to increase risk weight, banks have hiked interest rates and become more selective in their lending practices, driving companies towards alternative funding sources like commercial papers and bonds. Firms expecting rate cuts soon are opting for CP issuances, while larger AAA-rated firms and PSU entities seeking long-term financing are favouring the bond market, where investor appetite remains robust. High-credit NBFCs, particularly those rated AAA and AA+, are increasingly turning to the market for long-term funds. More than 80% of total fundraising since April has come from NBFCs.”
The data reveals that AAA-rated firms have been particularly active, raising ₹54,680 crore through corporate bonds between August 1 and September 16, accounting for 74% of total issuances. AA+ rated NBFCs contributed 8% to the total. In August alone, CP issuances surged to ₹1.4 trillion, up from ₹1.05 trillion in July, highlighting a growing preference for short-term funding solutions.
Banks have shown increasing reluctance to lend to NBFCs since the RBI’s regulatory changes. As of July 26, 2024, outstanding bank loans to NBFCs had decreased to ₹15.29 trillion from ₹15.48 trillion in March. Year-on-year growth in bank loans to NBFCs has slowed to 12.7% by July, compared to 19.9% the previous year.
Despite the challenges, borrowing rates for NBFCs have softened, reflecting a decline in benchmark bond yields. “Rates have dropped as yields on government securities have come down. There is definitely interest in raising funds through the debt capital markets. However, large-value fundraising remains challenging, with volumes skewed towards PSU or corporate house-backed NBFCs. It is mostly the better-rated NBFCs that are able to access the capital market for fundraising,” noted a rating agency official.
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The yield on AAA-rated 10-year corporate bonds has fallen by 9 basis points since August, while yields on five-year bonds have softened by 29 basis points. Similarly, AA+ rated 10-year and five-year corporate bond yields have dropped by 3 basis points and 6 basis points, respectively, during the same period.
PRIME Database highlights that major issuers in August included REC, which raised ₹6,820 crore, followed by Power Finance Corp with ₹5,791 crore, LIC Housing Finance with ₹5,760 crore, and NABARD with ₹5,000 crore. The National Bank for Financing Infrastructure & Development also contributed ₹3,911 crore in August. These five entities together accounted for 38% of the total amount raised during the month.
Looking ahead, the festival season is expected to see continued activity in the debt capital markets. A dealer at a state-owned bank anticipates an increase in both short-term and long-term debt issuances. “As rates continue to soften, we expect more issuances, particularly in the form of commercial papers,” the dealer said.
In conclusion, as bank funding slows, NBFCs are increasingly turning to the bond market to meet their financing needs, driven by the regulatory environment and evolving market conditions. The trend reflects a broader shift in the financial landscape, with capital markets playing a crucial role in supporting credit demand during key economic periods.
