How is the bond market driving Indian companies away from banks?

While these are still early days, bankers said large corporates are increasingly locking in funds by selling bonds instead of opting for floating rate loans amid rising interest rate scenario.

For AAA-rated corporates, the 2-3 year bond is now available at 7.15-7.45%, while the three-year bank rate is 7.3-7.5%.

Most of the money raised by these companies matures in 2-3 years.

AAA-rated non-bank lenders and state-run companies have been tapping the bond market over the past few months. Several infrastructure companies, especially in the road and telecom sector and the National Investment and Infrastructure Fund (NIIF), are also selling bonds.

“Manufacturing companies, which were dependent on bank lending, have started issuing fixed rate bonds. Public Sector Units (PSUs) have started coming in the market. Ajay Mangaluniya, managing director, JM Financial, said, “In the short term, higher issuance in the market leads to lower supply in the long term.”

According to data compiled by Prime Database, Debt of Rs 1.45 lakh crore has been raised by selling bonds since June. This is 15% higher than the amount raised through bonds and non-convertible debentures last year.

Banks have also been borrowing from the bond market by raising perpetual, tier-II and infrastructure bonds.

Punjab National Bank, Bank of Baroda and Canara Bank raised funds through Additional Tier-I or AT1 bonds.

Issuance of certificates of deposit (CDs) has also seen a boom as banks mobilize these short-term funds to meet credit demand, which is driving deposit growth.

“Only AAA corporates are selectively looking at the bond market. Non-AAA-rated companies still prefer the debt market. Credit spreads have become very tight, and yields on AAA-rated bonds aren’t rising as much. Dhaval Dala, Chief Investment Officer, Edelweiss AMC said, while the credit spread on 10-year AAA corporate bonds was around 25 basis points (bps), it has narrowed to around 10 bps on G-Secs on a year-on-year basis.

While borrowing from the bond market can often be cheap, it can also be fraught with risk. Bond investors can be fickle and exit quickly when things go bad. In contrast, banks develop long-term relationships with their customers and often support them in bad times.

That said, banking sector credit growth remains strong, expanding 15.8% from August 12 a year ago, driven by demand from retail and small and medium businesses, while working capital demand among corporates remains healthy.

According to Reserve Bank of India data, loans taken by large companies grew by 3.3% in June from a year ago, the fastest since the outbreak of the pandemic.

Jefferies analysts expect banks’ credit growth to touch 13-14 per cent during the coming festive season as corporates have more inventory and retail credit picks up.

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