Will large companies now look towards bond market for funding options?

Reserve Bank of India (RBI) has drawn up a draft framework for borrowings which may force large companies to turn towards bond markets for their funding needs and shun bank loans. 

Under the new norms, the central bank has tightened screws with an aim to limiting or capping lending to large companies at a consolidated level. Big corporate borrowers will be accorded with the title of 'specified borrower' and banks will be allowed to buy companies' bonds to recover their loans. 

A specified borrower defined by RBI is a borrower with an aggregate fund-based credit limits of more than Rs 25,000 crore at anytime during FY18, Rs 15,000 crore at any time during FY19, and Rs 10,000 crore at any time from April 1, 2019. 

Care Ratings said, "This is in turn would help temper the risks faced by the banking system that arises following high lending to large corporate."

However Care Ratings believe that exposure to these norms may not have any effect on banks and corporate during the current fiscal but over the medium term, these measures will have an impact on borrowing patterns. 

RBI's new initiative will help increase in cost of bank loans for large conglomerates beyond a certain level. There will also be lower level of risk of banks on account of concentration of exposures in few large corporate entities.

Large companies would increasingly tap the corporate bond markets for their funding requirements and corporate bond issuance could be expected to see an increase. 

Such would be another bolster to the measures announced by RBI for the development of corporate bond market. 

On August 25, the central bank of India announced various measures for strengthening fixed income and currency markets. 

RBI’s measures involves enabling lenders to issue masala bonds, to accept corporate bonds under the liquidity adjustment facility, higher ceiling on credit enhancements and providing Foreign Portfolio investors (FPIs) direct access to bond trading platforms.

High rated companies are expected to benefit directly in the short-term.  However the investment guidelines for most investor classes will require changes, to move down the credit curve. 

Soumyajit Niyogi, Associate Director of Ind-Ra said, "The RBI’s measures for the development of the fixed income and currency markets is a step in the right direction and can help broaden the market over the medium- to long-term."

In most developed bond markets, corporate bonds are permitted to be used as collateral for liquidity operations. Allowing corporate bonds as collateral for liquidity operations will improve the demand for corporate bonds, from the perspective of banks subscribing to these bonds. This will help develop a robust secondary market for ‘AAA rated’ bonds (assuming the final guidelines restrict it to AAA paper), said Ind-Ra. 

Further, the major puncture in the banking system--stressed assets--may finally witness some improvement in the coming days. Banks' gross non-performing assets (NPA) ratios would see a gradual moderation in coming years. 

During this quarter, public sector banks saw gross-NPAs doubling over 10.42% from 5.38% in FY15 and 4.52% in FY14. While private lenders witnessed 3.03% from 2.14% in FY15 and 1.94% in 2014.