Non-banking Finance Companies (NBFC) that are wary about the continued volatility and bearish outlook

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in the stock market are increasingly tapping the retail debt market to raise funds for their businesses. Many NBFCs have started lining up their second rounds of retail bonds and debenture issues this year in the hope that retail investors would prefer such debt avenues for investment when the equity market is becoming unreliable.

Muthoot Finance, which raised Rs 1,000 crore through a retail non-convertible debenture (NCD) issue in August this year, has lined up another retail NCD issue, which is expected to hit the market soon.

Infrastructure lending firms IDFC and L&T Finance closed their tax-saving infrastructure bond issues in November, much ahead of time considering that February-March is usually the period when tax-saving infrastructure bonds hit the market.

Between June and August, many NBFCs including Muthoot, Shriram Transport Finance, Manappuram and IIFL raised about Rs 5,500 crore through retail NCD issues, most of which were subscribed fully.

“The idea of coming out with a second NCD issue so soon is to tap retail investors when the stock market is volatile. Compared with bank deposit rates, NCD issues offer better interest rates. However, the bigger objective of the issue is to diversify our resource pool,” Oommen K Mammen, chief financial officer of Muthoot Finance, told Financial Chronicle.

The interest rate of Muthoot’s NCD issue will certainly be higher than the 12 per cent, offered in the previous issue, he said. With highest interest rates offered by banks being 10.50 per cent for deposits of one-year tenure, the 12 per cent-plus returns offered by such issues are certainly attractive.

While bond issues of IDFC and L&T Finance though promised a more modest 9 per cent returns, they fetch tax exemptions of Rs 2,060 to Rs 6180, depending on the tax slab where the investor falls.

But why would companies want to lock themselves in credit with such high interest rates when it is widely believed that interest rates have peaked?

“These companies operate in segments such as home loans, vehicle or gold loans where higher interest rates could be easily passed on to the customer. Such NBFCs cannot raise funds through rights issues or follow-on public issues now, considering the tough stock market conditions.