Short-term borrowing cost falls below overnight repo

The cost of short-term borrowing from markets has plummeted for firms, even below the overnight repo rate, thanks to the Reserve Bank of India’s (RBI) bond yields and liquidity-supporting measures.

Most entities are avoiding the longterm corporate bond route, given the slump in the economy. Instead, they are managing with working capital loans raised at ultra-low rates from the bond markets.

Meanwhile, banks are looking for safe bets to give loans, given the huge liquidity they are sitting on.

Food Corporation of India (FCI) is said to have borrowed ~75,000 crore from banks at a rate as low as 4.69 per cent, the Times of India reported.

This was much lower than the 3month Marginal Cost of Funds-based Lending Rate (MCLR) of 6.65-7.10 per cent of public and private sector banks. Lending to the FCI makes a special case as it is seen as food credit — as good as lending to the sovereign.

However, private firms have managed to borrow at the same tenor of three months at way lower than what the FCI managed, which comes as a surprise.

“Markets are good to go to for a few thousand crores, every now and then. But if you need ~75,000 crore at one go like FCI, you have to go to banks,” said a corporate CFO.

For instance, Grasim Industries on Wednesday raised 3-month commercial papers at 3.30 per cent — way below the overnight policy repo rate of 4 per cent — and even below the RBI’S reverse repo rate of 3.35 per cent. On the same day, Godrej Industries raised money for the same maturity at 3.37 per cent, while Tata Power raised it at 3.47 per cent.

Reverse repo is the rate the RBI offers to banks to store their excess liquidity. At present, the banking system is running with liquidity surplus of over ~7 trillion.

Such ‘problem of plenty’ is great news for everybody, including government entities. The National Bank for Agriculture and Rural Development (Nabard) raised a 3-month commercial paper at 3.28 per cent on Wednesday, while HPCL raised funds for 25 days at 3.17 per cent.

“The RBI measures have driven rates to plummet by 20-30 bps, and banks have no other avenue to deploy this fund. There is a limit to how much you can park with the RBI,” said a primary market bond manager.

However, the same enthusiasm is missing in dated (more than a year maturity) corporate bonds. Banks and NBFCS have not been very active despite some big issuances, with most of them limited to a set of investors.

Among NBFCS, HDFC issued 36,930 bonds at a face value of ~10 lakh each, due on August 11, 2023, for a coupon of 5.40 per cent to some private banks and investment banks. SBI had a record tier-ii bond offering, raising ~8,931 crore at 6.80 per cent. The secondary market for bonds, though, is buzzing and yields are falling rapidly. For example, HDFC bonds maturing in July 2022 are offering yields of just 4.96 per cent.

RIL bonds maturing in August 2022 are trading at 4.66 per cent, while SBI’S tier-ii bonds issued less than a month ago are trading at a yield of 6.60 per cent.

However, there is a catch. Markets remain accessible only for firms rated ‘AA’ and above, and not necessarily for those rated below ‘A’. For a vast majority, bank loans remain the only viable avenue.

Though banks are saddled with excess liquidity, the better-rated firms have moved to bond markets and lenders won’t entertain lower-rated firms. RBI Governor Shaktikanta Das had warned banks at the Business Standard Banking Conclave last week that such extreme risk aversion was self-defeating.

The RBI also noted in its annual report that banks and NBFCS were losing their importance as primary financial intermediaries thanks to the easy access to capital and bond markets.