NBFCs likely to see rise in bond market borrowing costs
economictimes.indiatimes.combond market after the banking regulator Thursday assigned higher risk weights to unsecured advances, potentially increasing debt supply by pushing these borrowers to sell corporate bonds while making it more expensive for banks to lend to this credit subsegment.
Corporate bond yields, therefore, are set to head north as a large section of non-banking finance companies (NBFCs), hitherto relying on bank funding, increase debt supply to garner incremental capital, prompting investors to demand higher rates of interest.
«There could be some widening in terms of credit spreads for NBFCs.
Funding costs for them could go up from the bond market, too, in case NBFCs start replacing a part of their borrowing from banks with funds from the debt capital market,» said Anil Gupta, senior vice president & co-group head, ICRA.
«Up to 20 basis points would be the incremental cost that banks may start charging.
If the markets are efficient, then bond spreads should increase by a similar amount.»
One basis point is a hundredth of a percentage point.
On Thursday, among other steps aimed at de-risking the credit market, the RBI announced an increase in risk weights on loans given by banks to NBFCs, effectively pushing up capital needs for all classes of lenders. That will mean higher interest rates for all borrowing segments.
Risk weights refer to the capital banks must set aside to cover for credit risk from a particular loan segment.
NBFCs, which have also been directed to increase risk weights on consumer credit barring certain exceptions, now need more funds as the new norms exert downward pressure on their capital ratios.
