Indian banks’ $105 billion worth maturing debt stokes appetite for more bonds

By Divya Patil

As Indian lenders prepare to refinance the biggest debt maturity for any three straight years in a decade, investors are lining up.

The financial sector, faced with almost Rs 7 lakh crore ($105 billion) of notes coming due over three years, will drive rupee-denominated issuance, helped by lower bond funding costs and rising demand, says SBI Funds Management Pvt.’s Rajeev Radhakrishnan. Issuance hit a record for the second straight year to Rs 5.1 lakh crore in 2016 and EdelweissBSE -0.45 % Asset Management Ltd. predicts that level will be outpaced this year, enough to whet mutual funds’ appetite for quality-rated corporate bonds.

“There are no pricing pressures seen for these companies to refinance in the bond market as the supply is in line with the demand,” said Radhakrishnan, head of fixed income at SBI Funds, India’s fifth-biggest money manager with Rs 1.3 lakh crore of assets as of Sept. 30. “Asset managers are getting bigger, hence the demand too will be stronger. We will continue to invest in the sector to the maximum limit allowed.”

Lenders, the dominant borrower in India’s bond market since at least 2000, have to repay an unprecedented Rs 1.9 lakh crore of notes this year, data compiled Bloomberg show. The liability will swell to Rs 2.5 lakh crore each in 2018 and 2019, the largest bond maturity of any three consecutive years since 2007.

The share from the financial sector in rupee bond issuance is increasing as banks have been slow in cutting lending rates, said Radhakrishnan. The average yield on top-rated three-year corporate notes is at 7.39 per cent, 76 basis points lower than a similar maturing loan at the nation’s largest lender State Bank of IndiaBSE -0.69 %.

“Bond market participants are not perturbed by the maturity amount at the moment,” said Dhawal Dalal, Mumbai-based chief investment officer for fixed income at Edelweiss Asset, who estimates that rupee bond sales could hit as high as Rs 5.5 lakh crore in 2017. “We will look to invest in the sector at the opportune time. There is enough appetite.”

Buying Power
Assets under management of mutual funds, the biggest buyers of the financial sector’s debt, have risen to an all-time high of Rs 17.4 lakh crore as of the end of January, data from the Association of Mutual Funds in India show.

Key points on bonds due over three years based on Bloomberg-compiled data:
>>Consumer finance segment has Rs 2.32 lakh crore of notes maturing, the highest in the sector, followed by commercial finance
>>About 98 per cent of the redeeming notes are denominated in Indian rupees
>>The busiest month for redemption this year is March with at least Rs 38,800 crore of bonds coming due

>>About 37% of total maturity in 2018 is due in February, March and April
>>About 85 percent of the notes expiring have maturity of up to five years

“The investor class is comfortable in investing in bonds issued by the financial sector,” said Suyash Choudhary, Mumbai-based head of fixed income at IDFC Asset, which oversees Rs 56,900 crore. “There could be some issuer specific refinancing problem if the credit deteriorates overtime, but there are no refinancing risks seen for the
sector as a whole.”

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