The government’s credit line and guarantee measures for non-banking financial companies (NBFCs) have not immediately resulted in a meaningful contraction in spreads in the corporate bond market, data shows.
Experts, however, are of the opinion that spreads will contract as the credit lines start to get utilised, and banks regain confidence about NBFC papers for the long term, armed with the partial credit guarantee.
On Thursday, Finance Minister Nirmala Sitharaman announced a special liquidity scheme of Rs 30,000 crore for NBFCs, housing finance companies (HFCs) and microfinance institutions (MFIs). All the investments made under this scheme will be guaranteed by the government.
In addition, the government said it will also extend the partial credit guarantee scheme to cover borrowings, such as primary issues of bonds, commercial papers of NBFCs, HFCs, and MFIs, wherein the government will bear the first 20 per cent loss as guarantor for even unrated papers. This will enable another Rs 45,000-crore liquidity support to the shadow banking industry.
Papers of lenders with credit rating AA and below will be eligible for investment under the scheme.
However, the measures failed to bring down the yields on corporate bonds immediately, as government bond yields also stayed almost flat from its previous close.
“There is still a huge exposure risk with NBFC papers, and the details of investment are not out yet. It will take some time, but the spreads will contract,” said the head of treasury of a bank.
A number of well-rated papers, and government entities were traded in the corporate bond market, even as lower-rated bonds were thinly traded. A 10-year bond of Nabard got traded at 6.88 per cent, REC at 7.56 per cent, while AAA-rated HDFC three-year bond got traded at 6.94 per cent. The yields were marginally lower than usual.
NBFCs typically borrow debt maturing between 3 years and 7 years from the corporate bond market. Generally, the spread between the 5-year G-sec and an equivalent maturity AAA paper should be around 60-70 basis points (bps). In times of stress, this spread has even widened to 90-100 bps. However, the spread is now at about 120 bps. For AA papers, the spread is now 185 bps and for A-rated papers, the spread is now at 290 bps, according to data from Fixed Income Money Market and Derivatives Association of India.
Even as shadow banks in the recent past have been hit hard, the AAA-rated NBFCs did not face much of a problem. The Reserve Bank of India (RBI) did not find liquidity issues in the top 50 NBFCs it monitored. Risk-averse banks have been buying papers of only AAA-rated NBFCs, whereas the need for liquidity is more felt in lower-rated firms.
And so, in the last Rs 25,000-crore auction of targeted long-term repo operations (TLTROs), banks barely borrowed half of the Rs 25,000 crore that the RBI gave them to on-lend to the NBFCs.
The government’s dedicated credit lines, along with a guarantee scheme, makes the situation a lot easier for NBFCs.
“Now even unrated bonds may get credit guarantee and is, therefore, a great enabler. We should see compression of spreads. However, the lukewarm response to the last tranche of TLTROs will bear a reminder that the implementation is as critical as before,” said R K Gurumurthy, head of treasury at Lakshmi Vilas Bank.
“The package announced by the FM on Wednesday opens access to funding for non-prime investment grade NBFCs, which had found very little appetite from banks through the TLTRO. The presence of a sovereign guarantee backing their issues will direct liquidity their way and help them tide over the challenges brought about by nonavailability of moratorium on their bank and capital market liabilities,” said Nachiket Naik, head, corporate lending at Arka Fincap.