NBFCs Return To Public Deposit Markets, But Old Scars Remain

After a turbulent few years, bookended by the collapse of IL&FS and the Covid-19 pandemic, non-bank lenders are returning to the public deposit market to raise funds.

NBFCs have tapped retail investors to raise over Rs 5,500 crore through non-convertible debentures so far this fiscal. According to data from Prime Database, 12 different non-bank financial companies have tapped the public debt markets to raise money since April 2021. JM Financial Products Ltd. is the latest in the market, looking to raise about Rs 500 crore from investors.

So far, investors have not disappointed, with most issuances managing to raise funds equivalent to the base size.

This is despite the turbulent experience retail investors had with companies like Dewan Housing Finance Ltd., Reliance Home Finance Ltd. and SREI Infrastructure Ltd. In all the three cases, retail as well as other NCD holders either have had to take significant haircuts or are uncertain about when they will recoup their investments.

Investors are being discerning, said Ajay Manglunia, managing director and head of institutional fixed income at JM Financial.

"Investors over last two years have made a distinction between highly leveraged companies such as DHFL and those which are coming to the market now. They understand that these are comparatively safer investment bets," said Manglunia.

Still, investors are extracting higher rates from these non-bank lenders in return for relatively elevated risk levels.

Lower-rated lenders such as Sakthi Finance Ltd. and Indel Money Ltd. paid the highest effective yields at 13.64% and 12.43%, respectively, owing to their BBB rating. Typically, companies rated BBB are of the lowest investment grade.

In comparison, Muthoot Finance Ltd., which is rated AA+ and raised Rs 1,700 crore in April, had to pay an effective yield of 6.6-8%, depending on the maturity of the NCDs. The maturity of these NCDs ranges from 36-120 months, where longer-tenor papers offer higher yields to investors. Muthoot Finance paid high net-worth individuals and retail individual investors an additional incentive of 0.25% per annum.

"They (NBFCs) want to attract more retail and HNI money since it is much stable and sticky in nature,” said Manglunia. Mutual funds have moved away from the market for NBFCs and they are left with only bank financing to address their borrowing aspects, he said.

Even within similar rating categories, investors are differentiating.

For example, AA-rated IIFL Home Finance Ltd, which aimed to raise up to Rs 1,000 crore in July, managed Rs 656 crore at an effective yield of 9.6-10% for a seven-year period.

In comparison, similar-rated Piramal Capital and Housing Finance Ltd., which is taking over the assets of DHFL, raised the full Rs 800 crore it set out to mop up at an 8.1-9% effective yield, for three to 10 years.

While the relatively higher rates being paid by some NBFCs could be an indicator of the risk perception of those firms, it is not indicative of any market trend, said Jindal Haria, director, India Ratings & Research Ltd.

"When you look at longer-tenor deposits, the market thins out significantly. In such situations, the buyer can charge higher yields from the issuers," Haria said. "We're also in an environment where banks are offering significantly lower interest rates on fixed deposits, so the retail interest in such NBFC papers makes sense."