MUMBAI, OCT 5: After an exciting run last year, financial institutions and companies are now shying away from the bond market, thanks to the uncertain movement of interest rate structure. Even though institutions and others raised over Rs 10,700 crore through public issues of bonds and other debt instruments last fiscal, they are yet to make a mark in the current year with many of them burning their fingers in the interest rate fluctuation.

In fact, FIs and companies have not raised any money from the public debt market in the first six months of the current year. Institutions tried the private placement market avoiding the public debt route, but they faced a tough time, thereby forcing the institutions to cancel or postpone their plans. The IDBI private placement programme in May faced stiff resistance as interest rates were bottoming out.

The volatile interest rate scenario has forced the Industrial Credit and Investment Corporation of India (ICICI) to defer its Rs 600 crore retail bond issue. The financial institution which had earlier planned to hit the market in September had deferred the move. IDBI was forced to jack up the interest rate bands on its Rs 1,000 crore bond issue (Omni Bond Series VIII) two months ago.

``Even in the private placement market which was doing roaring business till recently, big investors have now become cautious in putting money. Apart from volatile interest rates, the CRB scandal scared investors,'' said an official with a leading institution. Although institutions raised around Rs 7,529 crore through 47 debt issues in the private placement market in the first quarter (April-June, 1997), the number of such issues have come down in the second quarter. As of now, nobody is clear about the direction of interest rates. The interest rate on debt instrument had already come down from around 16.5 per cent to 14 per cent and less in the last one year. ``There is a widespread expectation that interest rates may fall further. Even fixation of interest rates is a big problem,'' said a merchant banker.

Many institutions which came out with debt instruments at high interest rates of 16-16.5 per cent last year had, in fact, suffered a loss as interest rates plummeted later. Investors who picked up bonds at such high interest rates are unlikely to opt for early redemption. Apart from top institutions like ICICI, IDBI and IFCI, even private sector companies like Larsen & Toubro, Tata Steel and Arvind Mills had offered high interest rates of 15 per cent and above.

Although some institutions claimed that they had deployed the money effectively with a good spread, it is unlikely to be on a long-term basis. For, their commitments with the investors run for seven or eight years. This means that these companies have suffered a notional loss following the interest rate fall. It is unlikely that they will make yet another loss by going in for fresh offerings. Result: the cost of borrowings has turned out to be very high and this will also be reflected in their balance sheets. All these factors also point to the fact that corporates have not been able to take advantage of the fall in interest rates.

It's not only FIs and leading corporates, even non-banking finance companies (NBFCs) which raised fixed deposits at 17-20 per cent interest rates are finding it difficult to service the capital. On the other hand, investors who made merry with high yields are unhappy with the sudden fall in interest rates. The disappearance such instruments will be a big blow to retail investors who are already disappointed with the capital market.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.