Cogencis, Friday, May 10

By Vishal Sangani and Manish Suvarna

MUMBAI - Rates on short-term debt papers surged to a six-month high in April because lack of demand from mutual funds, and tight liquidity in the banking system overshadowed a 25-basis-point repo rate cut by the Reserve Bank of India and a fall in issuances.

Rates on two-month certificates of deposit and commercial papers rose 50-85 basis points in April.

Postponement of repayment for a few fixed-maturity plans made investors risk-averse, which hit inflows into debt funds and in turn weakened demand from mutual funds for short-term debt instruments.

Kotak Mahindra Asset Management Co had fixed maturity plans scheduled to mature in April and May. The plan that matured in April was not repaid, while the one maturing in May will be rolled over due to delay in redemption of bonds of Essel Group.

The asset management company, through its fixed maturity plans, has exposures to non-convertible debentures of two Essel Group companies--Konti Infrapower and Multiventures Pvt Ltd and Edisons Utility Works Pvt Ltd.

Moreover, rating downgrades of entities such as Dewan Housing Finance Corp, PNB Housing, Reliance Home Finance and Reliance Commercial Finance added to the market's jitters.

Tight liquidity in the banking system added to the strain on short-term debt rates in April.

In April, the liquidity deficit in the banking system widened to 1.6 trln rupees due to lack of government spending and higher outflows on account of goods and services tax payments.

However, towards the end of the month, the deficit narrowed to 900-950 bln rupee due to a pickup in government expenditure and funds supplied through the RBI's foreign exchange swap auction worth 348.74 bln rupees.

Rates on short-term debt papers also rose, taking cues from a rise in yields on Treasury bills.

The yield on the 91-day T-bill rose 21 basis points to close at 6.44% in April. Usually, CDs and CPs are issued at a premium over the yield on Treasury bills.

The rise in forward premium rates also had an impact on the short-term debt market. Banks were said to be locking in lucrative forward premium rates, rather than deploying funds in commercial papers, which entail a credit risk. Along with the liquidity deficit in the banking system, this is one of the factors to have kept rates on commercial papers elevated.

As of Apr 30, rates on two-month papers issued by manufacturing companies were at 7.35-7.50%, against 6.55-6.70% the previous month, while those issued by non-banking finance companies were at 7.65-7.80%, compared with 6.90-7.05% in March.

As on Apr 30, rates on CDs maturing in two months were at 7.00-7.10%, against 6.50-6.65% a month ago, while rates on CDs maturing in three months were at 7.20-7.35%.

Issuance of CPs declined 16.6% on month in April, as companies had borrowed heavily in March to meet their working capital needs. Companies raised 1.86 trln rupees through CPs in April, compared with 2.23 trln rupees raised the preceding month, according to data compiled by Cogencis.

CPs worth 1.36 trln rupees were issued in April 2017.

Fund raising through ultra short-term debt papers to meet financing requirements for initial public offerings added to the total supply of CPs in April. CP issuances worth 215.65 bln rupees were towards initial public offerings.

The initial public offering of Polycab India Ltd last month comprised a fresh issue of shares worth up to 5 bln rupees.

Usually, such initial public offering-related CPs have a maturity period of 7-15 days, and are sold at rates higher than those offered on regular CPs. In April, such CPs were sold at 7.75-10%, mostly by non-banking finance companies looking to raise funds to meet demands of customers subscribing to share offerings.

Fund houses prefer ultra short-term CPs of non-banking finance companies because such instruments offer higher returns in a short span of time.

Bajaj Finance was the largest issuer of CPs related to funding initial public offerings, raising 30 bln rupees in April, followed by IIFL Wealth Finance Ltd, which issued papers worth 25.25 bln rupees.

In April, issuances by bon-banking finance companies declined 21% on month to 571.01 bln rupees, while those by housing finance companies fell 49.5% to 136.14 bln rupees, according to data compiled by Cogencis.

Borrowing by manufacturing companies through CPs was marginally lower at 1.18 trln rupees, compared with 1.23 trln rupees in March.

Indian Oil Corp, which raised 139.95 bln rupees through CPs, emerged as the largest issuer in April. Reliance Jio Infocomm Ltd, which issued papers aggregating 107.00 bln rupees, came in second.

Reliance Industries, Hindustan Petroleum Corp Ltd, Larsen and Toubro Ltd, Aditya Birla Finance Ltd, and National Fertilizers Ltd were other major issuers in April. 

CERTIFICATES OF DEPOSIT

Following the heavy issuances of CDs by banks in March, to manage their year-end requirements, April was a dull month, with issuances down 79.5% on month at 227.75 bln rupees.

This phenomenon, referred to as 'window dressing', is done by banks at the end of a year or quarter, as banks use these short-term deposits to offer short-term loans to customers. This leads to bulking up of the book, which enables banks to show higher growth and improvement in ratios such as non-performing assets on a bloated book.

Among state-owned lenders, only Bank of Baroda, Bank of India and Indian Bank hit the short-term debt market with total issuance at 125.75 bln rupees in April. This is 82.7% lower from 725.50 bln rupees raised by such banks in March, as per data compiled by Cogencis.

Bank of Baroda topped the list of issuers in April, with debt offerings of 73.25 bln rupees, followed by Bank of India, with issuances totalling 50.00 bln rupees.

Issuance of CDs by private sector banks also fell in April. Private sector banks raised just 66.50 bln rupees through short-term debt last month, compared with 327.85 bln rupees in March.

Among private sector banks, IDFC First Bank issued the most CDs, raising 30 bln rupees, followed by Axis Bank at 20 bln rupees.

In the 'other financial institutions' category, National Bank for Agriculture and Rural Development and Small Industries Development Bank of India were among those to have raised money from the short-term debt market, issuing CDs worth 20 bln rupees and 15.50 bln rupees, respectively.

Banks had raised around 203.75 bln rupees through CDs in April 2018.  End

Edited by Maheswaran Parameswaran