Lower liquidity in the system likely to accelerate more offshore bond issuance by NBFIs: Fitch Ratings

Amid sustained bank and non-bank financial institutions (NBFI) credit growth, tight system liquidity in India is likely to lead to more offshore bond issuance by NBFIs in the near to medium term, according to a Fitch Ratings report.

It said NBFI issuance has already accelerated in the first half of 2024, although issuers are likely to remain price-sensitive when raising offshore funding.

“Indian finance companies have long US dollar refinancing requirements, reflecting the recent pickup in US dollar bond issuances in 1H24 after slower activity in previous years.

“We expect Indian issuers to opportunistically leverage US dollar markets when onshore-offshore rate differentials become favourable,” according to the report on APAC EM (Asia Pacific Emerging Markets) NBFIs.

Fitch observed that many Indian issuers have returned to offshore bond markets after a hiatus in recent years.

Muthoot Finance Ltd., Manappuram Finance Ltd. and Indiabulls Housing Finance Ltd. joined regular issuer Shriram Finance Ltd. to issue medium-term US dollar bonds in 1H24 for the first time since the onset of the COVID-19 pandemic.

“We expect funding costs for rated Indian issuers to increase modestly, but without refinancing risks for better-rated entities,” the rating agency said.

refinancing activity

Fitch stressed that refinancing activity in India should be well supported amid the favorable economic backdrop, although tight banking sector liquidity will encourage issuers to diversify funding sources. Foreign bank funding, domestic and offshore bonds, and securitization offer possible options.

The report found that many Fitch-rated NBFIs in India, Indonesia and Sri Lanka focus on consumer and micro, small and medium enterprise loans, with tenures ranging from a few months to about three years, while longer-term home loans And others focus on securing financing. Make up a small portion of the sector’s assets. Therefore, some companies use higher levels of short-term debt to better cover the life of their assets.

The short-term funding maturities of rated Indian and Indonesian issuers, at 30 per cent-40 per cent of total assets, largely align with their short to medium term asset profiles. Short-term maturities are mostly bank loans, which reduces refinancing risk.