Borrowing costs

bond market: NBFC borrowing costs expected to decline with HDFC’s exit from the bond market

Mumbai: The Indian bond market could become less crowded, thanks to the proposed merger of Housing Development Finance Corp Ltd (HDFC Ltd) with HDFC Bank, which would likely reduce the cost of funds for borrowers.

Nearly a tenth of borrowings in the bond market could decline, as HDFC accounted for so many bonds sold in the country. The merged entity will have access to cheaper deposits to fund mortgage activity. Additionally, as a provider of banking services, the merged company will have less regulatory leeway than a housing financier to raise funds from long-term institutional bond investors, including investment companies. assurance.

This could be a blessing for other non-bank financial players such as Bajaj Finance, LIC Housing Finance and L&T Finance. The cost of their fund could fall, as fund managers would have few alternatives to invest in high-quality financial services bonds.

Even smaller companies in the HDFC group, such as HDB Financial and HDFC Credila, can also benefit while raising resources.

In the just-ended financial year, HDFC Ltd accounted for 9%, or ₹50,157 crore, of total bond sales, compared to just 0.9% for HDFC Bank (₹5,016 crore), according to data compiled by JM Financial.

HDFC Ltd and HDFC Bank are both triple-A rated. Insurance companies and pension funds see HDFC Ltd bonds as a preferred destination to deploy their money.

But now sector caps will come into play. Investments by insurers in HDFC Ltd bonds fall under the “housing and infrastructure” category, where they must deploy a minimum of 15% of assets under management.

However, an insurance company has a 25% limit when it comes to investing in the banking and financial services sector, the category the combined entity will fall into.

The local financier is also a go-to investment for mutual funds, as they sometimes seek to generate trading gains on these debt securities. HDFC Ltd bonds are highly liquid in the secondary market. SMFs have a one-time investment limit of 20%.

With HDFC Ltd’s exit from the bond market, it will publish investment limits for other non-bank companies in the group, including HDB Financial and HDFC Credila, a dedicated education lending company.

“HDFC Ltd is in the league of major sovereign-backed entities including NHAI, PFC, REC, PowerGrid, etc. said Ajay Manglunia, managing director and head of fixed income at JM Financial. “Even state-backed investors including EPFO ​​(Employees’ Provident Fund Organization) or LIC of India are also underwriting these bonds. In its absence, other non-blue chip banks will have bargaining power. higher because fund managers can’t sit idle on inflows.”

For example, banks have a 25% investment limit on a single group. An insurance company cannot invest more than 15% in a single group entity.

“We are internally analyzing the impact of the absence of HDFC Ltd on local bonds, as we will plan our investments accordingly,” said the head of corporate bonds at a major bank.

A 10-year HDFC Ltd paper yields 7.15%, compared to 7.18% for LIC Finance bonds, 7.25% for Bajaj Finance and 7.50% for L&T Finance. For the ICICI Infra bond of similar duration, it is 7.05%. Those yields should now fall on the primary bond sale, dealers said.