Despite Fall In Yields, Lower-Rated NBFCs Still Pay Up In Bond Market

Despite a broad-based decline in bond yields following the Reserve Bank of India's 50-basis point cut, lower rated non-banking financial companies are finding little respite, three persons in the know told NDTV Profit.

Instead of cheaper funding, these non-bank lenders are being forced to pay a premium to tap the debt market.

This has come as the spread between higher rated corporate bonds issued by NBFCs and those rated lower has widened.

For instance, Cholamandalam Investment and Finance Co. which is rated AA+ issued a short-term bond at 7.38% last week, 82 basis points lower than a similar maturity paper it issued in January, before the rate cut cycle, according to data provided by PRIME Database.

In comparison, Indel Money Ltd., a BBB+ rated NBFC issued its bonds at 12.50% last week, just 50 bps lower than what it had issued in January.

Based on this example alone, the spread between an AA+ rated NBFC and that of a BBB+ rated company has widened to 512 bps as of last month against 480 bps before the beginning of the rate cut cycle.

The premium is even higher for longer tenure bonds. On an absolute basis, the overall cost of borrowing has declined, but for NBFCs rated AA- and below, the cost of raising funds through bonds remains stubbornly high.

Typically, high-rated bonds react first during a rate cut cycle and when the cycle settles down, there is brief phase when rates are unchanged and liquidity is good. Then investors start looking at high-yielding bonds, a senior bank treasury official, said.

Overall, funds raised by NBFCs rated AA+ and above by way of bonds were worth Rs 3.42 lakh crore since the start of 2025, while those rated AA and below borrowed Rs 24,622 crore in the same period, PRIME Database showed.

There are several factors behind this divergence, such as lingering concerns around asset quality led by overleveraging and elevated credit costs in the unsecured segment.

"As the overall NBFC segment loan growth slows down, the impact for 'A and BBB' category rated entities is higher due to the challenges resulting from asset quality stress, an elevated funding cost, and a slowdown in the partnership and co-lending businesses," Karan Gupta, head and director Financial Institutions of India Ratings and Research had said in a report last month.

Also, lower-rated NBFCs still rely heavily on bank funding, where transmission of rate cuts is slower than in the bond market. That's why even as bond yields fall, these companies only witness a lagged benefit in their overall funding costs.

For AAA and AA+ NBFCs, bond yields have fallen below the marginal cost of funds-based lending rate offered by banks, making the bond market a cheaper and more attractive source of funds.

Since January, three-year bond yields on AAA and AA+ rated NBFCs has fallen by 70 bps and 60 bps to 6.85% and 7.22%, respectively, according to a report by Bank of Baroda.

This is sharply lower than three bps rise in one-year MCLR for public sector banks at 9.08% as of May and 10% rate for private sector banks.

As for NBFCs rated A and below, bank credit remains preferable from a pure cost perspective, even as access to such funding becomes more challenging, the Bank of Baroda report said.