Muthoot Finance to raise $650 million at 7.125%
CL Jose
KOCHI: With the banks frantically scouting for deposits to catch up with the pace of their loan growth, NBFCs may be forced to look for alternate avenues for their funding needs, according to experts in the market.
If the banks opt to turn down the tap for NBFCs in order to focus more on building their own deposit base, most NBFCs will be in trouble.
Reserve Bank of India (RBI) has stated that bank deposits grew by 13.5 per cent year-on-year (YoY) in Q4 FY24, while advances grew by 20.2 per cent YoY. This means the credit growth outpaced deposit growth by far in the banking system towards end-FY24 creating a gap between deposits and advances.
According to informed sources, more NBFCs with good standing in the market, especially gold loan companies, are finalizing plans to again tap the external commercial borrowing (ECB) route to shore up their stable funding base.
High dependence on bank funding
While 78.5 per cent of the source of funding for Manappuram Finance is met by bank finance as of December end, 2023, in the case of Muthoot Finance, the largest gold loan company in the country, banks’ contributions to their stable funding needs is a bit low at about 62 per cent.
RBI has already voiced its concerns about the anomaly in the growth of deposits and advances in the banking system leading to an unsustainably high credit-deposit (CD) ratio for several banks. If the banks opt to turn down the tap, most NBFCs will be in trouble.
Muthoot to raise $650 million
Muthoot Finance on Tuesday (May 14) said it has decided to raise $650 million through the issue of 4-year senior secured notes to boost its stable source of funding.
The dollar-denominated notes will have a coupon rate of 7.125 per cent and is being issued under the $2 billion Global Medium Term Note (GMTN) programme of the company.
Muthoot has stated that the notes will be listed on the NSE International Financial Service Centre (IFSC) Ltd. This fund-raising comes under the External Commercial Borrowing (ECD).
In fact, Muthoot Finance didn’t have dollar borrowings in its liability book since June 2023, when the company had ECB or dollar funds worth Rs2666.4 crore.
Bank funding may become difficult
According to market sources, gold loan companies will have to tap all sources in order to ensure funding sources to keep the business moving.
The increasing demand for deposits has driven up the deposits rates as high as 9 per cent and above for term deposits.
Though external commercial borrowing (ECB) has always been cheaper than domestic rates, the price for hedging the exchange risk stayed very high until a few years ago, rendering external commercial borrowing an expensive proposal.
But these rates have fallen since then. Talking to businessbenchmark.news, a top official from South Indian Bank (SIB) said the hedging rates have more than halved in the past more than a year making it viable to tap the external commercial borrowing once again.
The dollar/rupee forward premiums have decreased from 4.6 per cent at the beginning of 2022 to 2.1 per cent as of March 2023, and are currently staying at around 2.4 per cent. This means the ECBs raised at 7.125 per cent could effectively cost around 9.6 per cent for the borrowers.
Since the biggest chunk of the fund base of any gold loan company is from the banks, any slowdown in the bank funding will have a detrimental impact on gold loan companies’ fund source.
