H1 bond volumes crimp 26% to `2.5 trillion on rising interest rates

Mumbai: Rising interest rate has seen a 26 percent de-growth in fresh corporate bond issuances at Rs 2.5 trillion in the first half of FY19 from a high Rs 3.4 trillion in the year-ago period, and may remain subdued in the remaining part of the year as well, says a report.

With such a de-growth, the volume of bond outstanding stood at low Rs 28.4 crore at the end of September, recording a growth of 9.7 percent as against 14 percent in March 2018, says domestic rating agency Icra in a report.

However, a shift in credit demand to banks and a low base effect resulted in a 12.6 percent growth in bank credit as of September.

Call money rates have been on an upwsing for a while and is trading at 9.5 percent and above.

But as investors shifted to short-term debt instruments, outstanding volume of commercial papers rose to Rs 5.5 trillion as of September 30, clipping at 41.5 percent, says Icra.

Karthik Srinivasan, group head for financial sector rating at the agency warned that the increased risk aversion towards non-banking finance companies (NBFCs) and housing finance companies (HFCs), bond and commercial paper sale is likely to moderate in the H2 as well, pushing these shadow banking entities to scale down their credit growth."

NBFCs and HFCs accounted for 55-60 percent of bond issuances during the last two-three years and around 41 percent of commercial papers outstanding as of end September.

"We expect commercial paper sales to decline by at least Rs 1 trillion during the second half, which will still translate in a growth of 20-22 percent in outstanding CP volume for the year.

"Further, assuming bond issuances of Rs 3-3.4 trillion for H2 against Rs 2.5 trillion in H1 and Rs 3.4 trillion in H2 of FY18, bond issuances are estimated to decline to Rs 5.5-5.9 trillion, (a decline of 15-20 percent) in FY19. With such a decline in bond issues, annual growth of bond outstanding shall decline to 7-8 percent for the year," says Srinivasan.

The report also noted that after the crisis of confidence in the NBFC sector following the IL&FS crisis, the liquidity have tightened in the system which as of October 22 was Rs 1.37 trillion, and improved thereafter as the Reserve Bank announced OMOs of Rs 36,000 crore in October and Rs 40,000 crore in November, taking the overall OMO purchases to Rs 1.26 trillion so far this year.

However, given the expectations of more liquidity crunch, the agency expects the overall OMO purchases to be at least Rs 1.6 trillion by the end of the December, as against OMO sales of Rs 90,000 crore during the entire FY18.

The continuing liquidity tightness will also have a negative impact on deposit growth of banks at 7-8 percent for the full year against 6.7 percent in FY18. Banks are seen netting only an incremental deposit build-up of Rs 5-6 trillion during H2, which was Rs 3.3 trillion in H1 and Rs 5.1 trillion in H2 of FY18.

The annual bank credit growth remains strong at 12.9 percent as of September partially supported by a low base in H1 of FY18.

Assuming an incremental credit of Rs 4.5-5.4 trillion in H2 against Rs 3.3 trillion in H1 and Rs 6.7 trillion in H2 of FY18, bank credit is expected to moderate to 9-10 percent for FY19 as nearly half the public sector banks which control 51 percent of the system as a whole are prevented from lending after being placed under the prompt corrective action framework. These 11 banks alone control around 20 percent of the system credit and deposits.

"Capital constraints of public sector banks and deposit constraints of private sector banks will continue to impact the overall bank credit growth," he warns, and forecasts that the overall credit growth from all these three sources—CPs, bonds and banks—is expected to moderate to 9-10 percent for the year.pti