Companies court savers
Cos are in the process of raising retail funds through deposits and/or bonds.
A number of companies are in the process of raising retail funds through deposits and/or bonds, with yields in the range of 11-12% per annum, well above the prevailing 8-9% deposit rate offered by banks. This seems to suggest intermediation through banks is not happening and borrowers are being forced to approach the savers directly. The obvious explanation would be risk aversion on the part of banks, as evident from their putting more money in government securities ��� the investment-deposit ratio has gone up from 29.51% to 31.42% over the last four months. The risk aversion is partly due to the possibility of large gains on the investments portfolio because of the declining interest rates.
In fact, part of those gains has already boosted banks��� bottom lines in the recently concluded quarter. The banks also could genuinely be concerned about the risks involved in lending to Indian corporates. Many of them may actually be in some difficulty, because of a combination of large borrowings and declining incomes, which would have made debt-servicing ratios look bad. In such a situation, retail borrowing may be the only option. After adding the intermediation charges, the cost of funds may work out a lot less than what banks would be offering based purely on the risk profile of the borrower. In fact, with government borrowing getting increasingly big and foreign inflows slowing down, such borrowing could well turn out to be cheaper than the rates available in the future. Besides, most bank loans are on floating rate, whereas retail deposits would be locked in at a fixed rate.
The investors would, however, do well to not get carried away by the high yields. While the commitment of big borrowers such as Tata Motors is beyond doubt, in the case of many others the high returns would go with high risks. Investors should look at the company fundamentals before investing. Smaller companies have been unable to pay back the depositors��� money in the past. The Companies Act does provide a recourse in a default situation, but that is via a lengthy recovery process. These risks must be borne in mind.
In fact, part of those gains has already boosted banks��� bottom lines in the recently concluded quarter. The banks also could genuinely be concerned about the risks involved in lending to Indian corporates. Many of them may actually be in some difficulty, because of a combination of large borrowings and declining incomes, which would have made debt-servicing ratios look bad. In such a situation, retail borrowing may be the only option. After adding the intermediation charges, the cost of funds may work out a lot less than what banks would be offering based purely on the risk profile of the borrower. In fact, with government borrowing getting increasingly big and foreign inflows slowing down, such borrowing could well turn out to be cheaper than the rates available in the future. Besides, most bank loans are on floating rate, whereas retail deposits would be locked in at a fixed rate.
The investors would, however, do well to not get carried away by the high yields. While the commitment of big borrowers such as Tata Motors is beyond doubt, in the case of many others the high returns would go with high risks. Investors should look at the company fundamentals before investing. Smaller companies have been unable to pay back the depositors��� money in the past. The Companies Act does provide a recourse in a default situation, but that is via a lengthy recovery process. These risks must be borne in mind.
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