How the bond market is turning India Inc away from banks

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Higher rated companies are selectively turning to the bond market for their borrowing needs, reducing their reliance on banks as the bond market offers lower interest rates and easier terms.

Although we are still in our infancy, bankers said that large companies are increasingly tying up their funds by selling bonds instead of opting for floating rate loans in a rate hike scenario. of interest.

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For a AAA-rated company, a 2-3 year bond is now available at 7.15-7.45%, while a 3-year bank rate is at 7.3-7.5%.

Most funds raised by these companies mature in 2-3 years.

AAA-rated non-bank lenders and state-owned companies have tapped into the bond market in recent months. Many infrastructure companies, especially those in the road and telecommunications sectors and the National Investment and Infrastructure Fund (NIIF), are also selling bonds.

“Manufacturing companies, which relied on bank loans, began to issue fixed-rate bonds. Public Sector Units (PSU) have started to hit the market. With more issues coming to market in the short term, there is a shortage in the long term,” said Ajay Manglunia, managing director of JM Financial.

According to data compiled by Prime Database, 1.45 trillion in debt has been raised by selling bonds since June. This is 15% more than the amount raised through bonds and non-convertible debentures last year.

Banks also borrowed in the bond market by raising perpetual, Tier II and infrastructure bonds.

Punjab National Bank, Bank of Baroda and Canara Bank raised funds through additional Tier I or AT1 bonds.

Issuance of certificates of deposit (CDs) also spiked as banks raise these short-term funds to meet credit demand, which continues to outpace deposit growth.

“Only AAA companies look selectively at the bond market. Non-AAA rated companies still prefer the loan market. Credit spreads have become very tight and yields on AAA-rated bonds are not rising. While the credit spread on 10-year AAA corporate bonds was around 25 basis points (bps) previously, it has narrowed to around 10 bps on G-Sec on an annualized basis,” he said. said Dhawal Dala, Chief Investment Officer, Edelweiss AMC.

Although borrowing in the bond market can often be cheaper, it can also involve risk. Bond investors can be fickle and withdraw quickly when things go wrong. In contrast, banks tend to develop long-term relationships with their customers and often support them through difficult times.

That said, credit growth in the banking sector remains strong, up 15.8% year-on-year to August 12, driven by demand from individuals and small and medium-sized businesses, while demand for funds turnover remains strong among companies.

According to data from the Reserve Bank of India, loans taken out by large corporations rose 3.3% in June from a year earlier, the fastest since the outbreak of the pandemic.

Jefferies analysts expect bank credit growth to peak near 13-14% as businesses hold higher inventories and consumer credit increases in the upcoming holiday season.

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