Skip to main content

Better rated firms moving to bond mkt, says RBI report

Better rated firms moving to bond mkt, says RBI report
Better rated companies are moving to the bond market, even as bank loans continue to remain an efficient financing tool for lower rated firms, the Reserve Bank of India’s financial stability report said.
Better rated companies can easily tap the bond market, and their borrowing costs are usually nearer the risk-free rate of sovereign treasury bills, rather than banks’ marginal cost of funds-based lending rate (MCLR). And, there is a significant differential, about 185 basis points between risk-free rates and the bank MCLR. One basis point is a hundredth of a percentage point
If the risk-free rate (govt securities) is 6.57 per cent for five-year money, AAA-rated companies, on an average, raise their fund at 7.39 per cent from the market. The bank MCLR is 8.41 per cent for the tenure
If a company with A rating has to raise funds from the market, the coupon it has to pay would be 10.2 per cent, according to the RBI. This shows companies below A+ will still be better off borrowing from banks. The differential has expanded the scope for disintermediation of bank financing by corporate bonds in case of quality corporates, the report released on Thursday said.
“Corporates might find it advantageous to place issues with mutual funds rather than accessing bank finance,” said the FSR report, adding such disintermediation trends are consistent across tenors. “To stem the erosion in the quality of credit portfolios, some well-capitalised banks have reportedly started resorting to risk-free benchmark based pricing, as opposed to MCLR-linked pricing.”
The spread differential between equivalent maturity sovereign bonds and highest rated corporate bonds are now around 80 basis points, less than the 100-125 basis points generally observed in the market.According to the FSR, foreign investors are increasingly keeping their investment position unhedged and the dollar borrowing cost for Indian companies would be benign because of the recent rating upgrade by Moody’s. These together give more reasons for top Indian companies to tap the bond route, rather than rely on bank financing.
The Business  Standard, New Delhi, 23rd December 2017

Comments

Popular posts from this blog

RBI minutes show MPC members flagged upside risks to inflation

RBI minutes show MPC members flagged upside risks to inflation Concerns about economic growth and easing inflation prompted five of the six monetary policy committee (MPC) members to call for a cut in the repo rate, but most warned that prices could start accelerating, show the minutes of the panel’s last meeting, released on Wednesday. The comments reflected a tone of caution and flagged upside risks to inflation from farm loan waivers, rise in food prices, especially vegetables, price revisions withheld ahead of the goods and services tax, implementation of house rent allowance under the 7th pay commission and fading of favourable base effect, among others. On 2 August, the panel chose to cut the repurchase rate—the rate at which the central bank infuses liquidity in the banking system—by 25 basis points to 6%. One basis point is one-hundredth of a percentage point. Pami Dua, professor at the Delhi School of Economics, wrote that her analysis showed “a fading economic growth outlook, as …

Shrinking footprints of foreign banks in India

Shrinking footprints of foreign banks in India Foreign banks are increasingly shrinking their presence in India and are also becoming more conservative than private and public sector counterparts. While many of them have sold some of their businesses in India as part of their global strategy, some are trying to keep their core expertise intact. Others are branching out to newer areas to continue business momentum.For example, HSBC and Barclays Bank in India have got out of the retail business, whereas corporate-focused Standard Chartered Bank is now trying to increase its focus on retail “Building a retail franchise is a huge exercise and takes a long time. You cannot afford to lose it,” said Shashank Joshi, Bank of Tokyo-Mitsubishi UFJ’s India head.According to the Reserve Bank of India (RBI) data, foreign banks’ combined loan book shrunk nearly 10 per cent from Rs 3.78 trillion in fiscal 2015-16 to Rs 3.42 trillion last financial year. The banking industry, which includes foreign banks…

Differential Tax Levy under GST: Food Firms May De-Register Trademarks

Differential Tax Levy under GST:Food Firms May De-Register Trademarks The government’s decision to charge an enhanced tax rate on trademark food brands is leading several rice, wheat and cereal manufacturers to consider de-registering their product trademarks. Irked by the June 28 central government notification fixing a 5 per cent goods and services tax (GST) rate on food items packaged in unit containers and bearing registered brand names, the industry has made several representations to the government to reconsider the differential tax levy, which these players say is creating an unlevel playing field within these highly-competitive and low-margin industries. Sources say that the move has affected the packaged rice industry the hardest and allowed the un-registered market leaders, India Gate and Daawat, to gain advantage as compared to other registered brands such as Kohinoor and Lal Qilla. Smaller players are even more worried with this enhanced rate of tax (against the otherwise …