Non-banking financial companies (NBFCs) in the last few months have increased their pace of borrowing through corporate bonds or other instruments with bank loans having become expensive after the Reserve Bank of India (RBI) introduced risk weight norms late last year.
“Regulatory changes have had a significant impact on NBFC funding and that is the reason they had to resort to raising funds through other means,” said Alok Singh, group head, treasury, at CSB Bank.
NBFCs raised Rs 88,340 crore in the July-September quarter through corporate bonds, compared to Rs 84,135 crore in April-June, according to data compiled from the BSE and NSE websites.
On November 16, 2023, the central bank increased risk weights on unsecured consumer credit and bank credit to NBFCs to pre-empt a build-up of any potential risk in these segments.
This has resulted in the total consumer loan growth in the sectors where risk weights were increased moderating from 23.3 per cent in November 2023 to 13.9 per cent in June 2024. In parallel, bank credit to NBFCs declined from 18.5 per cent to 8.2 per cent during the same period, the RBI said in a report.
Also, the cost of funds for NBFCs has risen after the risk weight norms. This led some NBFCs to cut their borrowing from bank in the subsequent quarters.
For instance, cost of funds at L&T Finance went up to 7.85 percent in Q1FY25, against 7.81 percent in Q3FY24. The component of loans from banks that were not part of priority sector lending reduced to 28 percent in Q1FY25 versus 29 percent in Q1FY24.
Aditya Birla Finance’s bank term loans dropped to 52 percent of total borrowings as of March 2024 from 53 percent a year earlier.
Bajaj Finance’s cost of funds rose to 7.94 percent as on June 30, 2024, compared to 7.74 percent as on March 31, 2024, and 7.04 percent as on March 31, 2023, as per an investor presentation.
However, easing market borrowing costs have also led NBFCs to switch from banks to the bond market for raising funds.
The yield on corporate bonds across maturities fell by 10-15 basis points (bps) between Q1 and Q2 of FY25. This was mainly due to a fall in yield on government securities amid global cues.
According to data compiled from market sources, yields on three-year corporate bonds was trading in the range of 7.56-7.66 percent in July-September, versus 7.64-7.74 percent in the April-June quarter.
Yields on five-year corporate bonds were trading at 7.45-7.60 percent in the July-September quarter, against 7.61-7.65 percent in the April-June quarter.
Similarly, yields on 10-year corporate bonds were at 7.30-7.50 percent in Q2, compared to 7.45-7.55 percent.
During this period, the yield on government securities, especially the 10-year benchmark bond, fell 36 bps amid inflows from foreign portfolio investors, easing inflation trends and rate cut expectations.
Currently, the 10-year benchmark bond, 7.10 percent 2034 yield, was trading at 6.7554 percent as of 12.00 pm.
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