Banks wary of falling yields

MUMBAI: Easy liquidity, low yields and benign inflation would normally be the perfect setting for increased issuances in the corporate debt market. However, that has not been the case.

Falling yields have deterred banks and companies from borrowing from the market owing to lack of clarity on whether they will fall further.

Yields in the corporate debt market have crashed by 100 basis points in the last week and 300 basis points since April as banks have preferred to park extra money in corporate bonds (rather than the sub-1% call money market).

“1-year corporate bond yields have fallen by 100 basis points. For example, Nabard issued a bond at 9.50% on June 29, but the yield has fallen to 8.60% today. Bonds issued in June have lost anything between 100 to 150 basis points,” said B Prasanna, senior vice-president, ICICI Securities.

“The ample liquidity in the system has not resulted in the rise in borrowings by banks as credit growth has eased and deposits have picked up — so banks don’t need to borrow like before,” said Manish Dangi, fund manager, Birla MF.

Credit growth has fallen to 25.65% according to RBI data dated June 8, down from 30.96% a year ago. Deposit growth has picked up to 23.38% compared with 20.26% a year ago.

Mutual funds (especially those with fixed maturity plans) are one of the main investors in corporate bonds.

“It’s just that people are not comfortable with issuing when yields are falling. They would rather wait to issue at 20 basis points higher after the yields bounce back after touching a floor then issue when they are falling,” Prasanna said.

However, dealers say it is just a matter of time before issuances pick up. “It could be just that issuers are waiting for the right level. I expect issuances to increase from next week onwards after the inflation numbers on Friday. Hopefully, there will be more clarity on liquidity,” said S Raghavanan, head of fund management, IDBI Capital Markets.

Banks are confused with the liquidity swings in the money markets. Call rates fell to a record low of 0.15% on June 21. However, excess liquidity got sucked out in end-June in a flash, as the government paid the RBI for buying its stake in the SBI. The money has flown back causing liquidity to shoot up once again and taking call rates back to below 1%.

Dealers say this month will be crucial both in terms of RBI policy and liquidity and will decide how much money is raised from the corporate debt market.