Indian non-bank lenders are preparing to issue offshore bonds to expand their funding channels as borrowing in rupees has become more expensive since the Reserve Bank of India increased risk weights for bank lending to shadow banks.
So far this year, Indiabulls Housing Finance, rated B by S&P, and Shriram Finance, rated BB/BB (S&P/Fitch), have raised a combined US$1.4bn from US dollar bonds and the pipeline for the second quarter is building.
Manappuram Finance is preparing to return to the offshore market for the first time since its debut in 2020 and Tata Capital is also heard to have had preliminary discussions with bankers for a potential debut US dollar bond offering, according to market sources.
"We are planning to raise US$300–$400m bonds in the April to June quarter for a tenor of three to five years, in the Reg S format," said Susil Mishra, head of investor relations and treasury at Manappuram Finance.
Meanwhile, Fitch has assigned a first-time long-term foreign and local-currency issuer default ratings of BBB– to Tata Capital and S&P a BBB– long-term issuer credit rating. The company did not reply to an email seeking confirmation of the plans.
Tata Capital launched a three-year loan facility of up to US$200m in March, according to LPC data.
Many NBFCs are seeking first-time ratings with the aim of raising offshore bonds and loans, according to rating analysts and bankers.
"There is a potential shift in borrowing from onshore to offshore post-RBI tightening the risk weight norms for banks’ lending to NBFCs in November last year," said Ajay Marwaha, head of fixed income at Nuvama UK.
The capital that banks need to set aside for their exposure to NBFCs was increased by 25 percentage points, rising to 45%, 55% and 75% for AAA, AA and A rated NBFCs, respectively, which has resulted in higher cost of borrowing for shadow lenders.
At the same time, the risk weights on unsecured personal loans of banks and NBFCs increased by 25 percentage points to 125%, forcing NBFCs to set aside more capital just as their cost of funding was already rising.
Rising interconnectedness
Non-bank lenders have become heavily reliant on domestic debt in recent years, leading to the current course correction.
According to RBI data, bank lending to NBFCs was close to 10% of total bank credit as of last June. Meanwhile, bank financings accounted for 38% of total NBFC borrowings as of September and 36% was from domestic bonds, according to S&P.
“Tapping the international market helps in reducing the interconnectedness [between banks and NBFCs] and it is healthy for the sector,” said Geeta Chugh, credit analyst at S&P.
Issuers can diversify their borrowings and increase the duration of liabilities by going offshore market, Chugh said.
In its December 28 financial stability report, the RBI warned that "the rising interconnectedness raises risks emanating from cross-sectional dimensions," as "banks and NBFCs have entered into various co-lending models with divergent underwriting practices and banks have been the major lender to NBFCs".
Back in 2019 and early 2020, NBFCs such as Muthoot Finance and Manappuram Finance sold dollar bonds, but onshore rates became very attractive during the pandemic following rate cuts by the RBI and rupee bonds and loans were favoured.
Regulatory risk
In the past few months, the central bank has taken a variety of measures to strengthen the financial system. Last November, it increased the risk weights for banks’ lending to NBFCs to contain unsecured lending. In January, it ordered fintech Paytm Payments Bank to stop onboarding new customers. Early last month, it barred IIFL Finance and JM Financial Products from disbursing gold loans and loans against shares, respectively.
The cumulative effect has weighed on the cost of capital for NBFCs. Banks have increased their lending rates to large NBFCs by 20bp–50bp since November, according to S&P.
"The stringent actions taken by the RBI on the finance companies indicate that the regulatory risk is rising in the country. The cost of capital will increase for both debt and equity," Chugh said.
"We understand that some banks are prolonging their assessment of incremental exposure to NBFCs as they have to adequately factor in the increased regulatory risks."
The growth of bank credit to NBFCs slowed to 14.7% year on year in February compared to 31.9% in February last year, according to central bank data.
Borrowing costs have also increased in the bond market as NBFCs pump out new bonds to make up for the slower growth in bank credit, DCM bankers said.
The spreads for AA rated NBFCs over AAA rated peers have expanded by 11bp to 78bp since mid-December, according to a note by IIFL Securities on March 26.
Offshore bonds
Most NBFCs, especially the larger ones, will consider raising offshore bonds to reduce the dependency on the domestic market, analysts and bankers say.
US dollar corporate bond issuance from India, including NBFCs, is estimated to rebound to US$15bn this year from US$4.8bn last year, according to Nuvama Wealth Management.
"The forex hedging costs have come down so far this year as seen in lower USD/INR forward premiums and the Fed Funds rate is also expected to ease [by] around 75bp this year," said Aditya Gore, head of international coverage and research for Indian fixed income at Nuvama.
In addition, while the domestic market is not very deep for Single B rated credits, the offshore market is more open provided issuers pay an adequate risk premium.
One limitation remains the regulatory yield cap that limits the offshore cost of borrowing at SOFR plus 500bp – currently about 10.3% for India. Indiabulls Housing Finance's recent US$350m 3.25-year secured social bond priced well inside the cap at 9.7%.