Cheap Corporate Credit: The Beginning Of The End?

The government's larger-than-expected borrowings will continue to push up corporate borrowings cost, which have risen in sync with higher government bond yields.

The government will borrow Rs 14.95 lakh crore from the market this year, according to its budget. This pushed up bond yields sharply to nearly 6.90%.

Corporate bond yields have risen equally sharply. AAA-rated borrowers are paying close to 5.9%, up from 5.2% an year earlier, to raise money for a three-year tenure, according to data by the Fixed Income Money Market and Derivatives Association of India. This is the highest since June 2020. For AA-rated borrowers, yields rose to 6.6%, from 6.1% an year ago for a three year tenure.

The rise is seen across tenures.

The large borrowing number will put sustained pressure on interest rates, Soumyajit Niyogi, associate director for credit and market research, India Ratings & Research Pvt., said. Key tailwinds in the last two years like the RBI's active open market operations purchase and tepid credit growth will also be missing in FY23, he explained.

"Interest rate trajectory has reversed in FY22, and it will realign to long term rate trajectory in FY23, which is 7% on an average," Niyogi said.

All rates will eventually have to align with the benchmark bond yields, said Ajay Manglunia, managing director at JM Financial.

In some sense, rising bond yields were inevitable, TV Narendran, president of the CII and global CEO and managing director at Tata Steel, said in a recent interview with BloombergQuint. Companies like Tata Steel and many others like it have deleveraged and brought down debt. "So, we are better prepared to deal with the rise in bond yields than we would have been maybe three or four years back." To that extent, companies have been prudent and been thinking about it, he said.

As borrowing costs in the bond market rise, some demand for credit may move back to banks which are still flush with liquidity.

Bank credit is showing signs of a turnaround after having languished through the pandemic. Non-food credit grew 9.3% in December 2021, from 6.6% a year before, according to data from the RBI. Credit growth to industry improved to 7.6% in December 2021 from 0.4% in December 2020.

Availability of funds should not be a problem.

Banks should be more willing to lend to large corporates as they have de-leveraged in the last two years but there may be pressure for mid and small size entities, said Niyogi.