Bonds, CPs save the day as loan growth languishes

Fundraising through the money markets may be helping banks deploy their idle funds in a year, when non-food credit growth has been bound within the 5-6% range. While incremental credit growth was negative through the first six months of FY21 — in repetition of an FY20 trend — a sharp increase in bond and commercial paper (CP) issuances resulted in a five-fold rise in consolidated credit in September, showed data compiled by Care Ratings.

In September 2020, the value of corporate bond issuances rose 41% year-on-year (y-o-y) to Rs 68,443 crore and that of CP issuances increased 255% to Rs 1.94 lakh crore. After adjusting for the Rs 99,000 crore fall in incremental credit, the consolidated credit outstanding for September 2020 was Rs 1.63 lakh crore, significantly higher than Rs 32,664 crore in September 2019.

Clearly, companies are preferring to borrow through the money markets rather than in the form of loans from banks. Experts say that money market rates are significantly below the repo rate at present and corporate bond spreads have also been falling since June. At the same time, much of the market borrowing has been led by state-owned entities. In H1FY21, the total corporate bond issuances amounted to Rs 3.79 lakh crore, 34% higher than Rs 2.84 lakh crore in the same period last year, Care said in a recent report, adding that nearly 40% of the issuances have been by public sector undertakings, such as Power Finance Corporation (PFC), REC and HUDCO, among others.

Recently, State Bank of India (SBI) chairman Dinesh Khara said that the bank is currently seeing credit growing in the range of 6-7%, while pointing to the fact that much of corporate demand for debt is moving to the markets. “When it comes to corporate credit growth, we have to be mindful of the fact that not many corporates are going to the credit market. They are going to the debt capital market. So if we add up our growth in the non-SLR portfolio, the growth would be about 10%,” he said, adding that SBI will have to readjust to the new realities and the corporates’ requirements.

Recent liquidity measures have also played a role in increasing fund flow through the markets, said Hardik Dalal, director – head of loans and bonds, Barclays Bank India. “Bank credit is available in plenty for highly rated companies with low or limited impact of Covid-19. These corporates are receiving funding through loans and bonds. Bonds have been a preference given the LTRO (long term repo operation) and PCE (partial credit enhancement) schemes,” he told FE.

As the PCE and TLTRO schemes reach full utilisation and credit demand begins to pick up in the near term, banks are likely to commence lending through loans, Dalal said. This is because the bonds route has limited incentive for banks, given the mark-to-market (MTM) risk associated with them. “We do expect credit growth to pick up in a measured way as corporates come out of the Covid ease out and growth starts to come back,” he said.