The non-bank financial institutions (NBFIs) in India will be active issuers of Masala bonds over the medium-term, according to rating agency Fitch.
This, in a way, reflects their rising need for diversified funding to support growth.
Masala bonds are typically issued outside the country. And, these are denominated in Indian rupees.
``Improving recognition of the Masala bond market among international investors could help improve relative pricing. However, only larger NBFIs with strong reputations are likely to find Masala bond ssuance viable,'' it said.
NBFI credit grew by 13% in 2017, around 4x faster than bank credit. The share of total credit extended by financial institutions rose to around 21% in FY17, from 17% in 2014. ``NBFIs are likely to continue to play an increasingly important role in India's economy over the next few years,'' Fitch said. This would help to compensate for likely weak bank lending, it added.
``NBFIs will require funding to support growth. We expect banks' share of funding to fall, given banks' capital constraints,'' Fitch said. NBFIs had already shifted towards bond market funding in recent years as yields had fallen while bank lending rates had remained stubbornly high, it said.
``Masala bonds - rupee-denominated bonds issued in offshore capital markets - potentially offer issuers a larger investment pool. At the same time, these will help them avoid the currency mismatches associated with international bond issuances denominated in foreign currency,'' Fitch added.
``Pricing remains an obstacle. Issuers have so far typically faced yields of 20-50 basis points higher on Masala bonds than domestic issuance. International investors' risk aversion towards Indian issuers and concerns over currency risks could mean this remains the case,'' the rating agency said.
Fitch felt that the pricing mismatch between Masala and domestic bonds could fade as the Masala market deepened and international investors’ recognition of it improved.
In this context, Fitch pointed out that the yields on Shriram Transport Finance Company's Masala bonds issued in March 2018 were lower than those on its comparable domestic bonds as per issuer feedback. Estimates suggested that there were $7 billion in Masala bonds outstanding at end-September 2017. This indicated reasonable activity since the first issuance in 2016.
