India Inc. Sells Record Debt to Savers Unsated by Deposits

  • Bond offerings to public in current fiscal year up sixfold
  • Jump comes as banks face pressure to tighten loan standards

Indian companies are selling record amounts of rupee bonds to individuals, tapping savers dissatisfied with deposit rates at decade lows.

Debt offerings to the public by companies surged to 239 billion rupees ($3.6 billion) in the seven months from April through October, up sixfold from the year-earlier period and the fastest pace on record, Securities & Exchange Board of India data showed.

For borrowers, the market is an alternative to lenders that are being pressured to tighten standards and clean up balance sheets. The Reserve Bank of India -- seeking to spur growth in the $2 trillion economy while keeping inflation and loan delinquencies in check -- has introduced measures to encourage firms to access bond markets, while putting in place rules that will restrict large companies borrowing from banks.

“The decision of the RBI to tighten lending norms for large corporates will make the cost of money dearer for these firms, thereby prompting them to tap the bond route,” said Harshil Mehta, chief executive officer at Dewan Housing Finance Corp., which raised 140 billion rupees through public bond sales in August. “Public issuance has helped to diversify borrowing profiles.”

Dewan Housing reduced the amount of funding it gets from banks to 44 percent from 58 percent in the three months to Sept. 30, and plans to cut that to less than 35 percent by March 31, Mehta said. Public issuance helped the Mumbai-based company lower the weighted-average cost of its debt to 9.33 percent from 9.90 percent a year earlier.

“The rise in public issuance can be attributed to the latent demand from retail investors as bank fixed deposits are providing lower returns,” said Kapil Krishan, chief financial officer at Manappuram Finance Ltd., which plans to raise 5 billion rupees though a public bond offering or a private placement this financial year. “I expect the trend to continue.”

While Indiabulls Housing Finance Ltd.’s debut public issue in September offered an 8.7 percent rate on three-year bonds, a similar-maturity deposit at State Bank of India, the nation’s largest lender, pays 6.5 percent, the lowest since June 2006. Sovereign yields of that maturity have fallen to 6.56 percent from 7.47 percent at the end of 2015.

Companies are choosing bonds over loans because banks haven’t followed RBI rate reductions, according to Shriram Transport Finance Co. The average yield on top-rated three-year notes dropped 61 basis points over 12 months to 7.49 percent, while State Bank of India’s minimum rate on a similar loan is 9.05 percent. The RBI has lowered its repurchase rate to 6.25 percent, a level unseen since 2011.

“Bond market yields have come in handy to reduce the cost of borrowings,” said Umesh Revankar, managing director of Shriram Transport. “Issuers are using low bank deposit rates as an opportunity to raise funds from high-net-worth individuals and retail investors.”

India’s banks are probably not worried about attracting less deposits as lending growth is muted, according to Mumbai-based Mahindra & Mahindra Financial Services Ltd. Year-on-year credit growth slowed to 8.85 percent as of Oct. 14, the lowest in almost four months, RBI data show.

Finance Minister Arun Jaitley in September said a deeper retail bond market is a priority. Nearly 94 percent of the 239 billion rupees raised through the public market in the April-October period was by first time issuers. JSW Steel Ltd. said on Oct. 27 it plans to refinance by raising 20 billion rupees through either public issuance or private note placements.

“The increase in spread between bonds and banks’ lending rates resulted in the jump in public issuance,” said Ramesh Iyer, managing director for Mahindra & Mahindra Financial, which held its maiden public offering in June. “Even the RBI wants corporates to raise money through bonds.”

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