LIC Emerges As Lender Of Last Resort For NBFCs Led By Shift In Strategy

Life Insurance Corp. of India has stepped up its purchases of good quality corporate bonds issued by non-banking financial companies, five people told NDTV Profit.

The shift has helped NBFCs raise longer tenure funds, which has been a challenge from banking channels after the Reserve Bank of India increased risk weights last year.

LIC is investing in more organised NBFCs and good secured assets, confirmed a senior official from the state-run insurer, requesting anonymity as they were not authorised to speak to media.

LIC did not respond to an email sent by NDTV Profit.

For instance, Cholamandalam Investment and Finance Co. raised Rs 1,100 crore through bonds maturing in 10 years at a coupon of 8.50%.

Of the total amount, LIC absorbed around Rs 650-700 crore worth of bonds rated AA+, which was fully subscribed. Cholamandalam Investment did not respond to an email sent by NDTV Profit.

The recent 15-year bond issuance by REC, when it raised Rs 3,000 crore at 7.09% was also said to have been lapped up by LIC. Of the total, India's largest life insurer is said to have invested Rs 1,500 crore.

Off late, LIC is said to have been one of the major investors in bonds issued by Bajaj Finance Ltd., Tata Capital Ltd. and Aditya Birla Housing Finance Ltd.

While LIC regularly absorbs supply of state-owned entities like REC, Indian Railway Finance Corp. and Power Finance Corp, its interest towards NBFCs has increased because of better yields, as it diversifies its portfolio.

Wherever there is a 10-year senior debt paper worth Rs 1,000 crore or above and no arranger is involved, market knows it is typically LIC, a person in the know said.

Typically, NBFCs raise funds through short-term bonds and borrow long-term funds through bank loans. However, after the RBI's push to diversify their borrowing mix and cut dependence on bank lending, they have flocked to the bond market for long-term funds.

In November 2023, RBI Governor Shaktikanta Das had said that increasing interconnectedness between banks and NBFCs may create a contagion risk. This is because bank exposure to NBFCs remain the highest, as they are also one of the key subscribers to debentures and commercial papers issued by NBFCs.

He had advised banks to constantly evaluate their exposure to NBFCs and that to individual NBFCs to multiple banks.

"NBFCs on their part should focus on broad basing their funding sources and reducing over-dependence on bank funding," Das had said in his speech.

Bank credit to NBFCs has fallen to 9.5% on year growth in September from 26.3% on year rise in the same period a year ago, according to RBI data.

NBFCs are finding it tough to get funding from banks after RBI directions, but we remain hopeful that it will change eventually as NBFCs give better returns, the official quoted above said, declining to specify to what level LIC intends to take its debt investments.

As NBFCs have already increased their funding through bonds in the two-three year space, the tight spreads in the 10-year space has been favourable for them, another person said.

Currently, spreads in three-year corporate bonds over corresponding government bonds are around 70 basis points, as against 30-35 bps in the longer tenure space.

Another reason why LIC has been keen on buying NBFC papers is because overall supply in the corporate bond market has come down due to uncertainty over recent regulatory changes.

On Sept. 18, Securities Exchange Board of India released guidelines on corporate debt issuances, which were perceived as requiring board approval for individual bond issues, be it through private placement or public issue. This led several companies to hold back their fundraising plans.

On Oct. 10, SEBI clarified saying that the amendments did not mandate prior to board approval for each term-sheet, but only required a review by the company's board.

Last month, state-owned entities raised Rs 22,922 crore through private placement of corporate bonds, down 26% from Rs 30,842 crore in September, according to data by National Securities Depository Ltd. and Informist. NBFCs raised Rs 16,851 crore from Rs 18,798 crore in September.