The instrument works well as a cheap funding source for non-banking financial companies, which are well-capitalised but rated lower in the BBB to A range, at a time when liquidity remains constrained.
For instance, Ess Kay Fincorp Ltd., that primarily focuses on vehicle financing and business loan segment, has in the recent past raised over Rs 300 crore through a mix of covered NCD and MLD issuances.
Borrowing costs via these instruments were 125-150 basis points below other funding avenues, said Vivek Singh, head of resource mobilisation and treasury at the non-bank lender.
Udaya Kumar Hebbar, managing director and chief executive at CreditAccess Grameen, shared that view. The microfinancier raised Rs 50 crore via a covered bond issuance that took its borrowing cost to 8.6%, which was 40-60 basis points lower than its average cost of funds.
The covered bond product, however, isn’t a great fit for all kinds of NBFCs.
“Because of the short-tenor nature of covered bonds, they would not be the first choice product for institutions (NBFC/HFCs) that offer longer tenure loans,” said Srikanth G, chief of strategy and finance at Five Star Business Finance.
Five Star has raised over Rs 200 crore via the covered bond route at a comparatively 75 -100 basis points lower than its average cost of borrowing by offering a covered pool of loans as security.
“While good from a diversification perspective, for entities like ours where typical loans range anywhere between 5-7 years, the product carries an inherent asset-liability mismatch,” he said. “Therefore, we would not prefer to have a significant exposure to covered bonds beyond a certain percentage of our overall borrowing.”
Data from ICRA also showed that based on the asset class, gold loans had the highest 46% share in market volume for covered bonds, followed by 28% for vehicle loans, 12% each for small business and wholesale loans, and just 2% for microfinance loans.