Mumbai/Singapore. Indian companies are finding it easier to raise funds through bonds than bank loans, as a surge in bad credit chokes off bank lending while investors seek higher-yielding investments for their cash.
The country has seen a record number of corporate bond issues this year, including from lower-rated and first-time issuers, partly as a result of troubles in the banking sector. Banks are grappling with $145 billion in stressed loans and are leery of extending more credit to the corporate sector.
Bankers expect companies to continue to tap the debt market despite bond yields having risen 25 basis points in the last two months as companies can still refinance at some 100-150 basis points below bank loans.
"The cost differential is a big fillip to bond issuers and also beneficial to investors like mutual funds who are receiving huge inflows of financial savings and are chasing yields which are higher than traditional bank deposits," Karthik Srinivasn, group head - financial sector ratings at ICRA Ratings, said.
"However, investors need to do their own diligence and cherry pick the companies as they go down the rating curve for higher-yielding assets."
Recently, Indian billionaire Anil Ambani's Reliance Communication missed on coupon payment but that has not dented investor appetite, fund managers said.
Investors are drawn by returns of 8.5-9.5 percent compared with bank fixed deposit rates of around 6.5 percent.
Renewable energy company Greenko Group raised $450 million for the first time in the domestic market in late October at 200 basis points below what it would have paid for a bank loan.
"The purpose of the bond is to refinance the existing higher cost loans obtained during project construction phase with better pricing," said Vasudeva Rao Kaipa, chief financial officer at Greenko Group.
Other first-time issuers include Nirchem Cement, Tanot Wind Power, Oriental Nagpur Betul Highway, Hindustan Oil Ventures - a welcome development for regulators who have long sought to develop the corporate bond market.
More established companies have also been lured to the domestic market. Reliance Industries raised 175 billion rupees ($2.7 billion) from the domestic debt market in the last three months.
Rising Demand, and Supply
Investors started putting their cash in banks after the government banned high-value notes in November last year in a bid to purge the economy of unaccounted money. That led to trillions of rupees of savings stashed at home flowing into mutual funds and insurance companies - the top investors in corporate bonds.
Mutual funds' share of corporate bond investments stood at 45.98 percent of debt assets under management as of end-July, up from 37.31 percent a year earlier, data from the Securities and Exchange Board of India show.
Bond supply has risen but corporate debt accounts for only a fifth of India's GDP compared with other emerging markets such as China, Malaysia and Thailand where the ratio is nearly 50 percent as of 2016, according to ICRA.
"We understand there will be good and continued demand from mutual funds especially fixed income group funds [...]," Greenko Group's Rao Kaipa said, adding that 8.75 percent was "reasonably attractive" to investors.
Corporate bond issuance climbed to a record 5.52 trillion rupees during January-September, 19 percent higher than a year ago, according to Prime Database.
On the other hand, banks' loans to corporates contracted 1.5 percent from March-September despite overall credit growing by 8.2 percent, which too was the lowest in over two decades.
"Five years back the share of bank loan versus bonds was 75-25 for a corporate," said Ajay Manglunia, head of fixed income at Edelweiss Financial Services.
"That share has changed to 65-35 now and will become 50-50 in the next two years."