Monday, December 18, 2017

CP Issuances to Gain Traction, Bond Market to Face Competition from Banks: India Ratings and Research
Wednesday, September 6, 2017 - 6:47:58 PM - By Soumyajit Niyogi
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CP Issuances to Gain Traction, Bond Market to Face Competition from Banks: India Ratings and Research
India Ratings and Research (Ind-Ra) anticipates commercial paper (CP) issuances may gain traction owing to the advent of the Goods and Services Tax (GST). On the other hand, tepid investment demand and excessive banking sector deposits are likely to force banks to increase their focus on capturing incipient credit demands, precisely for ‘AAA’ and ‘AA’ rated borrowers. This could impact activities in the primary bond market.

The agency believes that the implication of the GST is likely to increase working capital requirements for most of the manufacturing entities; therefore the impact is likely to be translated into higher of short-term funds requirements. Moreover, with CP rates being considerably lower than bank’s lending rate, it is likely to be a preferred financing option among borrowers, especially in the ‘A1+’ and ‘A1’ rated categories.

Ind-Ra believes the reduction in the CP tenure has magnified the overall gross issuances in the primary market. As per the data provided by Prime Database, issuances have mostly been in less than three months category from FY17. The major issuers were financial intermediaries. However, the gross CP issuances reduced to INR2.64 trillion during April-June 2017 versus INR2.91 trillion in April-June 2016 partially attributed to low requirements from public sector financial institutions and energy sector.
 
Meanwhile, activities in the corporate bond market will continue to face twin challenges emanating from low demand for credit and increasing competiveness of large commercial banks. The agency believes with the interest rate cycle hitting the bottom, a downward repricing of existing liabilities could facilitate a further reduction in rates. Few of the large banks have been cutting savings deposit rates over the last few weeks, which has long been agnostic to changes in the broader interest rate structure. Banks with comfortable capitalisation are favourably placed to expand their credit market share in the current environment of anaemic credit demand and competition from the corporate bond market.

The agency believes that the financial intermediaries’ bond issuances has benefitted largely by low yield and high demand from investors in the recent past. The situation has also paved the way for opportunities for the relatively new age housing finance companies to expand their source of financing to bond markets from the conventional banking channel.

As per Ind-Ra’s analysis, elevated state development loans’ yield curve has weakened the transmission of easing rate in the corporate bond market, despite in an environment of muted supply and elevated demand. However, a sharp drop in bond issuances under Ujwal DISCOM Assurance Yojana is likely to alleviate pressure; although state development loan issuances are likely to pick pace in 2HFY18.

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CP Issuances
Gain Traction
Bond Market
Face Competition
from Banks
India Ratings and Research