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More NCDs coming with attractive returns

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NON-convertible debentures (NCDs), which were a hit with the retail investors last year promising attractive returns of 11-13.50 per cent, are set to make a come back this year in a big way. Almost all the companies that tapped the retail NCD market last year — Shriram Transport Finance, Muthoot Finance, Religare Finvest, Shriram City Union Finance — are planning to come up with retail NCD issues in the next few months according to investment banking sources.

With equity markets remaining unpredictable and interest rates on bank deposits falling, retail NCDs that promise assured returns could well turn out to be a favourable investment instrument for retail investors this year too.

Dwindling credit support from banks has resulted in non-banking financial companies (NBFCs) hitting the retail NCD market yet again after launching a slew of issues last financial year.

The year 2011-12 proved to be the biggest for retail NCD issues with about Rs 5,105 crore being raised by six NBFC's, compared with Rs 500 crore raised by just one company, Shriram Transport Finance, in the year 2010-11.

Banks have their credit exposure limits in lending to NBFCs. But when the NBFCs are growing faster and bank lending is not growing at the same pace, we have no other choice but to tap other sources of funds like retail NCDs. The company, which raised Rs 750 crore last year through a retail NCD issue, is looking to raise a similar amount in the second quarter of this year.

With the NBFC sector growing at a scorching pace, the Reserve Bank of India (RBI) in January this year commissioned a study

which suggested a cap on bank lending to the non-deposit taking NBFC sector, as it posed a `systemic risk' since the NBFC's were involved in `higher risk activities', compared with the banks. Additionally, the RBI had also recently imposed a 7.5 per cent cap on a bank's exposure to any single gold loans NBFC, compared with 10 per cent earlier.

Bank credit to the NBFC sector too, dwindled, growing by 26 per cent in 201112 to Rs 2,218 crore, compared with the 56 per cent growth seen in 2010-11 to Rs 1,755 crore, according to RBI data.

Being an open market source, NCD is a much easier option for NBFCs compared with bank loans which are increasingly becoming difficult to get. The 11-13 per cent interest rates offered to NCDs is much cheaper compared with the rates that they borrow at from banks and the repayment tenure is also longer.

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