Typically, high-rated bonds react first during a rate cut cycle and when the cycle settles down, there is brief phase when rates are unchanged and liquidity is good. Then investors start looking at high-yielding bonds, Neeraj Gambhir, a senior bank treasury official, said.
Overall, funds raised by NBFCs rated AA+ and above by way of bonds were worth Rs 3.42 lakh crore since the start of 2025, while those rated AA and below borrowed Rs 24,622 crore in the same period, PRIME Database showed.
There are several factors behind this divergence, such as lingering concerns around asset quality led by overleveraging and elevated credit costs in the unsecured segment.
“As the overall NBFC segment loan growth slows down, the impact for ‘A and BBB’ category rated entities is higher due to the challenges resulting from asset quality stress, an elevated funding cost, and a slowdown in the partnership and co-lending businesses,” Karan Gupta, head and director Financial Institutions of India Ratings and Research had said in a report last month.
Also, lower-rated NBFCs still rely heavily on bank funding, where transmission of rate cuts is slower than in the bond market. That’s why even as bond yields fall, these companies only witness a lagged benefit in their overall funding costs.
For AAA and AA+ NBFCs, bond yields have fallen below the marginal cost of funds-based lending rate offered by banks, making the bond market a cheaper and more attractive source of funds.
Since January, three-year bond yields on AAA and AA+ rated NBFCs has fallen by 70 bps and 60 bps to 6.85% and 7.22%, respectively, according to a report by Bank of Baroda.
This is sharply lower than three bps rise in one-year MCLR for public sector banks at 9.08% as of May and 10% rate for private sector banks.
As for NBFCs rated A and below, bank credit remains preferable from a pure cost perspective, even as access to such funding becomes more challenging, the Bank of Baroda report said.
