Rising yields turn the tide for India’s corporate bond market
In all likelihood, corporate borrowers are now seeing the cost advantage of bonds over loans diminishing
Indian banks have been willing investors in corporate bonds this year. The push has come from their corporate borrowers because benign bond yields have had an advantage over loan rates. So much so that the largest lender, State Bank of India (SBI), saw its advances growth get a 1.43 percentage point boost, thanks to corporate bond investments in the December quarter.
This tide may be turning now. Data from the Reserve Bank of India (RBI) shows banks have reduced their investments in corporate bonds and debentures in the past two months. Total investment in corporate bonds by banks was down to ₹5.64 trillion by February-end, a 3.5% fall in two months. That dragged down the non-SLR (statutory liquidity ratio) investment which includes commercial paper and shares by 2.2% for the same period.
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The reason is largely the rise in bonds yields. Since January, government bonds yields have surged by 35% and that has meant that corporate bonds must follow. Yields on two-, three- and five-year corporate bonds have climbed 50-100 basis points. These are the most popular tenures and non-banking financial companies are the biggest borrowers in this segment.
In all likelihood, corporate borrowers are now seeing the cost advantage of bonds over loans diminishing. “Firms change their borrowing pattern depending on cost. Since yields are rising now, the preference for taking a loan is more. But this may not be a lasting trend," said a bond trader at a brokerage firm.
The shift in preference is showing in the overall issuance volume in February. Sebi data shows an 18% month-on-month drop in issuances for February. Clearly, the rise in yields has begun to bite. Rising yields are also putting off banks as bond investments have to be marked to market. Simply put, the bonds held by banks must be valued at the prevailing market rate rather than the rate at which they had invested in it. This entails a hit on capital.
Meanwhile, credit growth has improved. Loan growth was 6.57% year-on-year in February, a mild increase from the previous months. The FY22 outlook on bond yields doesn’t look good. As firms increase borrowing next year, bonds are likely to lose out on cost advantage. Considering the mark-to-market hit, banks won’t be willing investors either.
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