NBFC crisis takes toll on corporate bond issuance due to higher borrowing costs

Corporate bond issuance declined 13 per cent to Rs 4 lakh crore during the first nine months of the current financial year due to the higher cost of borrowing and slowing investment activity, says a report. Non-banking finance companies (NBFCs) witnessed higher cost of borrowings post-August 2018 across all the rating categories--AAA, AA+, AA, and AA--, according to a report by Care Ratings Tuesday.

"Higher cost of borrowings amid liquidity challenges in the NBFC segment (that dominates the corporate bond with a nearly 70 per cent share) as well as limited pick up in investments have contributed to lower issuances," the agency said in a report. The decline in the cost of borrowing for NBFCs and HFCs can be indicative of easing of liquidity concerns in this segment, it added.

The cost of borrowing through debt for AAA-rated NBFCs and non-NBFCs has come down from the levels seen in November 2018. It declined by 28 basis points for NBFCs, 109 bps for housing finance companies (HFCs), 20 bps for all-India financial institutions (AIFs), and 33 bps for non-NBFCs. Although the cost of borrowing has declined between November 2018 and January 2019, there has been an increase in borrowing costs for AIFs and non-NBFCs during December 2018- January 2018. It has increased by 14 bps and 2 bps during the period.

The report said interest rates in the corporate bond market were more competitive than bank loans but only in the case of AAA category. All the other categories largely faced higher borrowing costs compared with bank loans. NBFCs continued to face a higher cost of borrowings compared with AIFs, HFCs and non-NBFCs across all the rating categories.

It said going forward, there could be some relief provided to companies raising money from the bond market in the form of lower borrowing costs with the RBI reducing the repo rate and altering its stance to neutral from the earlier 'calibrated tightening'. In the sixth bi-monthly monetary policy review announced last Thursday, RBI reduced the repo rate by 25 bps to 6.25 per cent. It also changed its monetary policy stance to 'neutral' from the earlier 'calibrated tightening', signalling further softening in its approach to interest rates.

(With inputs from agencies.)