Tightened system liquidity in India, amid sustained bank and non-bank financial institutions’ (NBFIs’) credit growth, is likely to prompt greater offshore bond issuance by NBFIs in the near to medium term, according to a Fitch Ratings report.

NBFI issuance has already picked up in H1 of 2024, although issuers are likely to remain price-sensitive when raising offshore funding, it added.

“Indian finance companies’ US dollar refinancing needs are longer-dated, reflecting a recent pick-up in US dollar bond issuance in 1H24 after muted activity in previous years.

“We expect Indian issuers to tap US dollar markets opportunistically when onshore-offshore rate differentials turn favourable,” per the report on APAC EM (Asia Pacific Emerging Market) NBFIs.

Fitch observed that a number of Indian issuers have returned to offshore bond markets after a hiatus in recent years.

Muthoot Finance Ltd, Manappuram Finance Ltd and Indiabulls Housing Finance Ltd issued medium tenor US dollar bonds in 1H24 for the first time since the start of the Covid-19 pandemic, joining regular issuer Shriram Finance Ltd..

“We expect funding costs to rise moderately for rated Indian issuers, but without material refinancing risk for better-rated entities,” the rating agency said.

Refinancing activity

Fitch emphasised that refinancing activity should be well-supported in India amid a favourable economic backdrop, although tighter banking sector liquidity will incentivise issuers to diversify funding sources. Foreign bank funding, domestic and offshore bonds, and securitisation providing potential alternatives.

The report observed that many Fitch-rated NBFIs in India, Indonesia and Sri Lanka focus on consumer and micro, small and medium enterprise loans, with tenors ranging from a few months to around three years, while longer-tenor home loans and other secured financing form a smaller share of sector assets. Therefore, some companies use higher levels of short-term debt to better match their asset tenors.

Rated Indian and Indonesian issuers’ short-term funding maturities, amounting to 30 per cent-40 per cent of total assets, largely align with their short to medium tenor asset profiles. Short-term maturities are mostly bank loans, which tempers the refinancing risk.