Top India Arranger Foresees High Bond Costs for Shadow Banks
India’s shadow lenders must brace for higher bond borrowing costs as banks reduce lending to the sector following tighter regulations by the nation’s central bank.
(Bloomberg) --
India’s shadow lenders must brace for higher bond borrowing costs as banks reduce lending to the sector following tighter regulations by the nation’s central bank.
As the nation’s fifth-biggest arranger for rupee notes last financial year, Kotak Mahindra Bank Ltd. predicts that borrowing costs for financiers may climb as much as 30 basis points, and the increase will be even sharper for lower-rated shadow lenders providing unsecured personal loans.
The Reserve Bank of India in November asked banks to boost provisions against credit to the non-bank financial sector and unsecured loans to contain the surge in consumer debt. The impact of the measures is visible, with bank lending to financiers growing at a slower pace of 14.7% in February versus 31.9% a year earlier, and 15.6% in January, according to the latest RBI data.
Kotak expects “the largest supply coming from NBFCs as their liability profile may need to be skewed more toward capital markets as bank credit to this sector has been muted post increase in risk weightages,” said Sujata Guhathakurta, president and head of debt capital markets at the Mumbai-based lender.
“That may lead to an increase in credit spreads and higher effective costs for NBFC issuers,” she said.
There are signs of that happening. The extra yield investors demand to hold five-year AAA rated bonds from shadow banks over government notes has widened to 65 basis points, from 55 basis points in November when the RBI tightened rules. The spread widened to 138 basis points for similar maturing AA-graded financiers.
Excerpts from the interview:
- Guhathakurta sees rates softening in the bond markets as the RBI is expected to cut interest rates this year, and due to robust foreign inflows in India’s sovereign market as the debt gets included in global indexes
- “It will have some spillover effect as corporate notes are priced off government bonds”
- Rupee bond sales to rise by 10%-15% this financial year, with corporates, infrastructure and real estate firms tapping the market often, she said
(Adds video, updates bond spreads in sixth paragraph)
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