The spike in bond issuances by non-banking finance companies (NBFCs) and Banks in the first half of FY24 is likely to continue in the second half as well as they move in to shore up resources in the wake of the recent hike in risk weights on their exposure to consumer credit and credit card receivables and expectation that the central bank will keep liquidity tight to bring retail inflation down to 4 per cent.

Total funds mobilised via the NCD (non-convertible debenture)/bond (sub-debt) route by NBFCs and Banks during the first half (H1FY24: April to September) soared to about  ₹3.08 lakh crores vis-a-vis about Rs. 1.92 lakh crore in the year-ago period, per expert estimates.

“Post RBI circular on risk weightage, we could witness a sudden spike in primary bond issuance supply. In the past week, large issuers like Canara Bank, REC, SIDBI, IRFC, Tata Capital Finance and PFC have lined up to tap the bond market.

“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,” said Venkatakrishnan Srinivasan, Founder & Managing Partner, Rockfort Fincap LLC.

Concerned about high growth in certain components of consumer credit, the RBI increased risk weights on unsecured personal loans, credit cards (for banks as well as NBFCs), and banks lending to NBFCs by 25 percentage points.

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 basis points. Finance companies will be worse affected as their incremental bank borrowing costs will surge, in addition to the capital adequacy impact,“ per her assessment.

Venkatakrishnan said that with the sudden surge in bond issuances, if supply exceeds demand, yields on AAA-rated papers could go up 5-10 basis points, depending upon the issuer, tenor, and issue size. The yields could spike further for lower-rated corporates.