Commercial Paper Rates for Housing Finance Cos Surge since April; Govt Bond Yield Dips

Sumit Sharma 18 February 2019

Economy & Nation

The cost of borrowing for housing finance companies (HFCs) through the commercial paper (CP) route surged since the beginning of the financial year in April on tight liquidity, CARE Ratings said in a study.

The cost of borrowing through CPs for HFCs rose by 82 basis points during April 2018 and January this year. CP rates for companies in this segment rose to 7.65% as of January 2019 from 6.83% in April last year. CP rates fluctuated through the year owing to tight liquidity, business uncertainties and other factors.

In the month of November 2018, borrowing cost for HFCs in CPs rose to as high as 8.21%, or an increase of 138 basis points. For the financial year up to January, the increase is 82 basis points. Dewan Housing Finance Ltd (DHFL), Indiabulls Housing Finance Ltd, among others, are some of the housing finance companies, which also witnessed a downward trend in their share prices.

Dewan Housing, posted a 52-week low of Rs97 compared with 52-week high of Rs690. It closed Monday at Rs128.90. Indiabulls Housing ended the day on the BSE at Rs623.60, compared with its 52-week high of Rs1,396.85 recorded on 6 August last year. Last week on Monday, Indiabulls Housing posted its 52-week low of Rs576.35 on the BSE.

Besides HFCs, the cost of short-term borrowing for non-bank finance companies (NBFCs), all-India financial institutions, and non-NBFCs between April and January rose, despite only a modest 47 basis points rise in bank lending rates, as measured by base rate, weighted average lending rate and marginal cost of lending rate methods. This is despite banks transmitting only half of the changes in RBI (Reserve Bank of India) policy rates, reflecting the liquidity challenge faced by the sector.

For all the three categories, the increase in CP rate average about 93 basis points between April and January, CARE’s chief economist Madan Sabnavis and Sushant Hede, associate economist, said in a report.

Reflecting the state of the sector, yield on 10-year government bonds actually declined by 16 basis points between April last year and January to 7.35%. Government bond yield had risen in September to 8.09%, from 7.51% in April, because of tight bank liquidity, increase in crude oil prices and depreciation in the value of Indian rupee.

CPs are important unsecured, short-term money-market instruments issued by corporate entities to obtain funds for a span of up to one year to meet short-term debt obligations, writes Mr Sabnavis.

During July 2018, the cost of borrowing for NBFCs rose to as high as 9.92%. Rates rose as much as 178 basis points in July over June following CP issuances by six NBFCs at a rate of 11%-12%, compared to the usual rate of around 7.37%.

NBFCs and HFCs are key borrowers of short-term funds via this channel accounting for almost 55% of the fresh CP issuances on a monthly basis. The balance 45% of the fresh CP issuances is raised by public sector undertakings or private sector entities in either manufacturing or services sector. Since CPs are not backed by collateral, only entities with high credit ratings are able to sell them at a reasonable price, the rating agency said.

Following the rise in CP rates, fresh issuances have declined, especially by HFCs and NBFCs. The share of HFCs fell to 8.2% as of January from 28.5% in April last year. Share of NBFCs declined to 24.5% from 39.6%, while the share of non-NBFCs remained steady at around 20-25%. Borrowing by All-India financial institutions rose to 40% from about a quarter.

CP rates may decline following a quarter percentage point cut in repo rate by the RBI in its latest monetary policy earlier this month.

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