Companies prefer bond, commercial papers over banks for capital

MUMBAI: Companies continued to look out for cheaper sources of capital, and shun banks for bond and commercial papers to raise inexpensive funds.

They raised more than ₹1 lakh crore in 2016-17 through commercial papers, almost double the previous year, to fund their shortterm funding requirements, Reserve Bank of India data show. But banks held on to AA- and lower category debt as mutual funds remained risk averse, choosing only higher-rated companies to bet their money on.


“The reliance on bank financing is definitely coming down; you can argue that it is due to higher liquidity or mutual funds’ involvement … but even from a regulatory point of view, the RBI feels that if everything is funded by banks, the concentration of risk is much higher,” said V Srinivasan, deputy managing director, Axis Bank. “Bank disintermediation ensures that risks do not lie only with a clutch of small players but is evenly distributed.”

As per RBI data, the banking sector finances only 35% of the total commercial sector funding requirements now, a significant drop from 50% merely a year ago. Private placements of corporate bonds and commercial papers constituted about 21% of the total funding requirements of non-financial companies. Non-bank finance companies and housing finance companies also emerged as alternate source of funds, accounting for 18% of the total financial flows.

“The increasing recourse to the bond market by large corporates was driven by the relatively cheaper costs of funds as bond yields fully transmitted the interest rate reduction of 175 basis points during the accommodative phase of the monetary policy that began in January 2015,” the RBI said in its Financial Stability Report.

According to RBI data, an AAArated company borrowing from the bond markets at yields of 6.99% for a tenure of one year, was getting bank funding at an MCLR (marginal cost of funds based lending rate) rate of 8.3%, a rate differential of more than 130 basis points. But a company rated between A+ and A- was borrowing at a rather expensive rate of 8.43% to 9.68% from the bond market, compared with the MCLR rate of 8.3% from banks, making borrowing from bank a much attractive proposition.

“To stem the erosion in the quality of credit portfolios, some of the well-capitalised banks have reportedly started resorting to risk-free benchmark-based pricing as opposed to MCLR-linked pricing,” the regulator said. “A significant differential between the risk-free rate (T-bill yield) and bank’s marginal cost of funds-based lending rate expands the scope for disintermediation of bank financing by corporate bonds in case of quality corporates; the corporates might find it advantageous to place issues with MFs rather than accessing bank finance.”