Corporates raise bond issuance for funding, turn back on bank loans

Indian corporate bond issuance in 2015 is likely to surpass 2013 and 2014 as expensive bank loans force companies seeking funding to try their luck in capital markets. So far, they haven't been disappointed.

Domestic firms have raised Rs 33,590 crore ($5.40 billion) via short- and long-term corporate debt so far in 2015, well on their way to matching the total of Rs 2.3 lakh crore raised in each of the previous two years, according to Thomson Reuters data.

Bank loans are relatively expensive even after the Reserve Bank of India (RBI) reduced its key policy rate in January to 7.75 per cent from 8.00 per cent. Only three out of 45 domestic commercial banks have lowered rates, with most arguing they cannot cut costs for borrowers as they are facing tight cash conditions. The RBI is loath to inject more funds into the overnight money market, saying it is providing sufficient funding, and that banks are simply not managing their cash well.

The average base rate of 10.25 per cent at state-run banks is 100-150 basis points higher than the Reuters 10-year benchmark corporate bond rate, which has fallen to 8.33 per cent from 8.58 per cent at the end of 2014. Yields have dropped on a fall in inflation, expectations of more rate cuts by the central bank and a surge in buying from foreign investors.

"The current spread between corporate bond yields and base rates is the maximum in at least the last few years," said Sandeep Bagla, associate director at Trust Group, a brokerage and wealth management company.

The low yields have attracted new - and rare - issuers, which further bodes well for issuance this year. Among them in recent months have been Reliance Jio Infocomm, Jindal Steel and Power and Nuclear Power Corp of India.

(Reuters)