The spike in bond issues by banks and NBFCs in the first half of FY24 is likely to continue in the second half as lenders shore up resources following the recent hike in risk weights on consumer credit, and on expectations that the central bank will keep liquidity tight to reign in inflationary pressures.

Total funds mobilised via the NCD (non-convertible debenture)/bond (sub-debt) route by NBFCs and banks during H1 FY24 soared to about ₹3.08 lakh crore from ₹1.92 lakh crore in the year-ago period, per industry estimates. Participants expect December to be a “bumper month” for bond issues, pegging total FY24 bond issues at 10 per cent higher than FY23.

“We could witness a sudden spike in supply of primary bond issuances. In the past week, large issuers such as Canara Bank, REC, SIDBI, IRFC, Tata Capital Finance and PFC have lined up to tap the bond market,” said Venkatakrishnan Srinivasan, Founder & Managing Partner, Rockfort Fincap LLC..

“We expect all large issuers to rush to the bond market before the forthcoming monetary policy committee (MPC) meeting considering that the last few policies were more hawkish than market expectations,” he added.

Concerned about the unprecedented pace of growth in consumer credit, the RBI increased risk weights on unsecured personal loans, credit cards and bank loans to NBFCs, by 25 percentage points.

Higher interest rates

S&P Global Ratings credit analyst Geeta Chugh, observed that the immediate effect of the hike in risk weights will likely be higher interest rates for borrowers, slower loan growth for lenders, reduced capital adequacy and some hit on profits.

“We estimate that tier-1 capital adequacy of banks will decline by about 60 bps. Finance companies will be the worst affected as their incremental bank borrowing costs will surge, in addition to the capital adequacy impact,“ she said.

While those with a higher portfolio of segments impacted by the new risk weights will bear much of the brunt on cost of funds, the impact is expected to be felt across the sector due to an increase in overall borrowing costs as market supply rises, market participants said.

Fitch Ratings said that the affected categories, including consumer credit, credit cards and top-up loans on vehicles, are major lending areas for entities such as Bajaj Finance and SBI Card. However, for others such as Shriram Finance, Muthoot Finance, IIFL Finance and Manappuram Finance, the lending impact could be less than 10 per cent of the portfolio.

“We estimate NBFIs’ bank funding costs could rise by 40-60 bps, assuming banks’ capital costs from higher risk weights on loans to NBFIs are fully passed on, adding to our expectation for modest NIM compression,” Fitch said.

Cost of funds

Last week, L&T Finance Holdings MD and CEO Dinanath Dubhashi had said that cost of funds could increase by 12-14 bps and the NBFC will look to gradually diversify its market borrowing and reduce the reliance on bank borrowings from the current level of around 32 per cent.

In the coming weeks, State Bank of India and Punjab National Bank are expected to tap the market with additional tier-I (AT-1) bonds, ICICI Bank with infrastructure bonds, and IDFC First Bank and RBL Bank with tier-II bonds. Among NBFCs, SBI Card, Hero Fincorp and Aditya Birla Finance are likely to line up bond issues, per sources.

Venkatakrishnan said that with the sudden surge in bond issuances, yields on AAA-rated papers could go up 5-10 bps and on AA-rated papers by up to 25-50 bps, depending upon the issuer, tenor, and issue size. The yields could spike further for lower-rated corporates.

Last week, L&T Finance Holdings MD and CEO Dinanath Dubhashi had said that cost of funds could increase by 12-14 bps and the NBFC will look to gradually diversify its market borrowing and reduce the reliance on bank borrowings from the current level of around 32 per cent. At a sectoral level, bank loans account for 35-40 per cent of NBFCs’ total borrowings.

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