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After an uncertain year, the non-banking finance sector (NBFC) aims to learn from its mistakes. Cutting their reliance on mutual funds, NBFCs are seeking to sell a record number of non-convertible debentures (NCDs), the same avenue they trusted a decade ago to cultivate a steady investor base.
Companies including IIFL, Piramal Capital, L&T Finance, Manappuram Finance, Aditya Birla Fin, Tata Capital Finance and Indiabulls Commercial Credit are engaging in fund-raising that would get them durable investors and help them balance cash flows from assets with their liabilities.
Usually, NBFCs source 10-15 percent of their funding from mutual funds, about 60 percent through banks and the rest from the debt market.
According to a report in The Economic Times, these companies seek to mop up Rs 15,000-20,000 crore in the next quarter and are in discussions with investment bankers to sell NCDs.
R Sridhar, CEO of IndoStar Capital, is quoted in the report saying that sale of NCD will go up as they had in 2010 when NBFCs had been in a similar distress. "It is natural for them to tap retail savings directly, which used to come via bank lendings earlier," he added.
Despite a possible downward movement in interest costs, investors could secure positive returns this year, according to the report. Dealers told the paper that interest rates could be in the range of 8.5-9.5 percent across three, five, seven and 10-year offerings.
Retail issuances likely to come to the market in the current fiscal reportedly include L&T Finance, which aims to raise Rs 5,000 crore, Shriram Transport, aiming to raise Rs 700 crore, and IIFL Holdings Rs 750 crore.
Sridhar said the cost of borrowing for NBFCs had increased about 50-100 basis points in the past three months. "NCDs aid in the diversification of borrowing sources. Although the cost of funds is higher, NCDs help NBFCs improve the liquidity and continue lending, with the higher cost of funds passed on to borrowers," he added.
Industry players believe that after the Infrastructure Lending & Financial Services (IL&FS) crisis in September 2018, short-term debt like commercial papers is a wobbly option for companies. Ajay Manglunia, Executive VP at Edelweiss Financial Services, told the paper that this is why NBFCs are turning to retail bonds via public issuance.
According to data by the Securities and Exchange Board of India (SEBI), companies mobilised Rs 29,394 crore through NCDs in 2018, much higher than the Rs 9,779 crore raised in the previous year.
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