Redemption reserves clause gone, non-bank cos will bank on bonds

Mumbai: The budget is set to revive the retail bond market, as a number of non-banking finance companies including Aditya Birla Finance, Mahindra & Mahindra Finance, Shriram Transport Finance and IIFL Finance are planning to raise at least Rs 10,000 crore in the ongoing quarter.

On Friday, finance minister Nirmala Sitharaman proposed to scrap the obligation of debenture redemption reserves (DRR), a provision that requires NBFCs to build a reserve over the term of the debt to repay investors. It was often termed as a stumbling block for NBFCs to raise money via public bonds.

“Abolishing DRR is an additional cost saving to an extent, as we are not supposed to set aside money from current year’s profits against principal repayments (for retail bond sales),” said Umesh Revankar, the managing director at Shriram Transport Finance. “This has given an addition push to do more public bond sales. In this quarter, we are planning to raise Rs 1,000-2,000 crore via such route.”

Shriram Transport Finance has planned to raise up to Rs 10,000 crore through public issuance this financial year. The company, according to a market source, expects to sell papers rated ‘AA+’, offering rates in the range of 9-9.50 per cent, similar levels at which it borrows money from banks.

Aditya Birla Finance could be considering at least Rs 5,000 crore of bond sales this financial year, said market sources.

The company didn’t respond to an email seeking comment until the publication of this report.

Mahindra & Mahindra Finance will more closely evaluate public issuance of NCDs after removal of DRR requirement, said Dinesh Prajapati, its head of treasury. “We are planning to tap the public market at an appropriate time as we seek to grow our book.”

This year, M&M Finance has approvals to raise up to Rs 10,000 crore via public issuances, of which it has already raised Rs 2,146 crore.

“Many non-banking finance companies have expressed interest to bring out public bond sales,” said Ashish Agarwal, the executive director at AK Capital, an arranger of debt sales. “DRR was seen as an obstacle for borrowers, who needed to block a portion of their profits. With this clause going away, many para banks would now be keen to tap the retail bond market subject prevalent market condition.”

IIFL Finance too is said to be exploring retail bond sales as it plans to raise up to Rs 5,000 crore this financial year. It has already raised Rs 1,000 crore. The company is likely to hit its second tranche within months, said a source with the direct knowledge of the matter.

HOW DRR WORKS?

If a company is to repay Rs 100 crore principal on a bond with five-year maturity, it must set aside one-fourth of it to create the reserves for the full repayment at the end of five years.

Out of this amount that is set aside proportionately every year, the borrower must invest 15 per cent in most liquid debt securities (government bonds), which earn much lower rates of interest than other securities.

To allow NBFCs to raise funds in public issues, the requirement of creating a DRR will be done away with, the finance minister said. DRR is currently applicable for only public issues, as private placements are exempted from the requirement.