Tight liquidity forces Indian NBFCs to look abroad

Mumbai: Non-banking financial companies are considering issuing bonds overseas to raise funds as liquidity conditions remain tight in India. The move also helps them diversify their funding profile in line with regulatory guidelines.

Since early 2024, NBFCs such as REC, Bajaj Finance, Shriram Finance, Piramal Capital & Housing, Muthoot Microfin, L&T Finance Holdings, HDFC Credila and Cholamandalam Investment & Finance have raised funds overseas in multiple tranches.

Additionally, Manappuram Finance, Bajaj Finance, Tata Motors Finance and L&T Finance Holdings, among others, have either got board approvals or are looking to raise funds through external commercial borrowings (ECB) in the coming weeks, according to market participants.

Increased risk weights

The initial round of overseas fundraising began after the Reserve Bank of India (RBI) increased risk weights for bank loans to NBFCs in November 2023, leading to a rise in borrowing costs for the latter.

Subsequently, crowding in the domestic bond market – driven by strong credit demand and rising funding requirements from lenders – has led more and more non-bank lenders to turn to offshore investments despite their higher cost.

“Higher risk weights have made bank funding more difficult for NBFCs, pushing them towards domestic bond markets, which is reflected in the rise in Tier I and Tier II bond issuances. Given this shift, NBFCs are now exploring overseas funding options as the next viable strategy for diversification, even if it entails a slightly higher cost,” said Venkatkrishnan Srinivasan, bond market expert and Founder & Managing Partner, Rockfort Fincap, a boutique financial advisory firm.

“The key priority is to ensure that they can raise the capital required to continue operations and growth, making the higher price an acceptable trade-off at this stage,” he said, adding that NBFCs are also reluctant to keep returning to domestic bond markets repeatedly due to increased bond supply or investor exposure limits being reached.

Gold rush in the market

The rise in domestic issuance is also due to the fact that even deposit-taking NBFCs are choosing to borrow more from the market given the narrowing spread between market and deposit rates as NBFCs have to compete with banks to offer high deposit rates.

Following the first quarter results, Shriram Finance MD and CEO YS Chakravarti told Mint that the average cost of funds for the quarter was 8.96%, of which the cost of retail deposits was 8.69%. The NBFC will continue to raise funds overseas through offshore bonds and development finance institutions till FY25, he said then.

While the US Federal Reserve rate cuts have not had the expected results, domestic borrowing has also become very costly due to high rates and higher indebtedness of banks and NBFCs in general.

Meanwhile, global banks are offering extremely low prices to cover costs as competition increases, making overseas lending even more attractive, another expert said on condition of anonymity.

Effect of warnings

The RBI’s multiple warnings to NBFCs regarding concentration in their funding profiles are also prompting such lenders to look for alternative funding avenues to diversify their borrowing profile, industry experts said.

“You have to assume that a certain part of their liability package will be priced higher compared to others, but we would prefer to keep a steady flow there so that in good times and bad times, we have access to capital,” Piramal Capital and Housing CEO Jairam Sridharan told Mint when the firm raised $300 million via its first offshore bond in July 2024.

“It’s an insurance policy to ensure that we don’t fall short at any point of time,” Sridharan said. The lender will raise another $100-200 million through a second tranche in the next 3-4 months, and eventually increase the share of overseas loans to 10-15% of total liabilities in 2-2.5 years.

Earlier this month, ICRA said in a note that NBFCs are expected to experience “headwinds related to availability of funds”, which in turn could cause credit/loan growth to decelerate to 13-15% in FY25 from 18% in FY24.

“However, key challenges to meet growth expectations would be accessing the necessary debt financing in addition to refinancing existing debt. Estimated incremental debt financing for expansion of assets under management is ₹“5.6-6 trillion for fiscal year 25,” he said.

Incremental direct bank credit to NBFCs in Q1FY25 fell to ₹7.500 crore rupees ₹92,000 crore in Q1FY24. As a result of slowing bank funding and drive to diversify their credit profile, the weighted average cost of funds of NBFCs is projected to rise by 20-40 basis points from FY24 levels, according to ICRA.

Indian corporate fundraising through dollar bonds had hit a 14-year low in 2023 as high global yields encouraged borrowers to opt for foreign currency loans.