A string of non-convertible debenture (NCD) issues, predominantly from gold loan-providing non-banking financial companies (NBFCs), has entered the Kerala financial market over the past few years. This signifies a rising public interest in this instrument as a reliable mode of investment.
While mutual funds have emerged as a ubiquitous investment option in recent times, NCDs with good credit ratings have gradually gained acceptance among the masses as a dependable savings instrument.
NCDs are fixed-income instruments for specific terms and interest rates. They are considered less risky than equity investments and offer a predictable rate of return.
One major attraction is the higher interest rates, ranging from 8 to 11 percent or more, offered by these NCDs, which surpass the interest offered by bank fixed deposits. Though not as secure as bank FDs, the strong credit ratings and gold-backed asset bases of the issuing companies help reinforce investors’ trust in these instruments.
Increased access to financial knowledge, facilitated by social media, has made the public more informed about various investment avenues. And, the stringent SEBI regulations have bolstered confidence in NCDs.
“People these days are quite aware of such investment avenues. They evaluate the credit rating and financial strength of the NBFC before investing in NCDs, which are a secure instrument that can even be traded,” said Thomas George Muthoot, the director of Muthoot Fincorp.
It is the middle class that appears to be more interested in NCDs. “A large number of salaried employees and retired persons constitute our customer base for NCDs. A small percentage of younger investors have also joined the bandwagon,” said Manoj Ravi, CEO of KLM Axiva Finvest, which concluded a successful NCD issue last month.
NCDs offer annual and monthly interest payment options. Retired persons often prefer the monthly interest scheme as it provides a regular monthly income to supplement their pension. Some retirees, like Sojan Joseph from Kanjirappally, prefer to invest large sums running into multiple lakhs in NCDs. “I participate in most NCD issues, earlier with Muthoot Finance and now with KLM Axiva, as the local manager is a close friend. I invest in both monthly and annual schemes,” said Joseph, who retired from work in Dubai over a decade ago.
Salaried individuals also find NCDs attractive as they allow for setting aside funds for children’s education or marriage through schemes lasting five to six years. Srikant Menon, who works for a private company in Kochi, prefers monthly schemes of NCDs as they provide regular interest every month. “This often helps with my monthly systematic investment plan (SIP) payments as I also invest in mutual funds,” he said. Some investors use the monthly interest from NCDs for chit-fund payments as well.
The average investment in NCDs by an individual ranges from ₹50,000 to ₹1,00,000, indicating that the general public does not typically invest large amounts. “Since most NCDs are issued by gold loan companies that usually don’t have significant non-performing assets (NPAs), there is minimal risk in allocating a portion of one’s earnings to NCDs. We advise our clients against putting all their eggs in one basket. Instead, we recommend spreading investments across different avenues like FDs and mutual funds,” noted G. Manikantan Nair, immediate past president of the Kerala chapter of the Association of Independent Financial Advisors.
NBFCs, for their part, find NCDs a cost-effective instrument for mobilising funds compared to bank loans. “Even the RBI has said that NBFCs should not rely solely on bank loans for funds but should explore different sources,” noted Thomas George Muthoot.
The funds raised from NCDs are used by NBFCs to open new branches and expand their gold loan business. For smaller NBFCs, NCDs offer a cheaper alternative to bank loans. “We don’t have significant exposure to bank loans. Moreover, banks charge higher interest rates. Larger NBFCs get bank loans at lower rates, so NCDs are a good option for us to secure funds affordably. We plan to issue around three NCDs every year, one each quarter,” said Manoj Ravi.
Kerala-based NBFCs have significantly increased their participation in NCDs over the past decade. Previously, Kerala’s presence in the national NCD scene was limited to larger NBFCs such as Muthoot Finance and Manappuram, with target amounts ranging from ₹250 crore to ₹500 crore. However, with the arrival of smaller NBFCs, the target amounts have averaged between ₹75 crore and ₹150 crore.
The gold loan NBFCs experienced robust growth after the Covid-19 pandemic, as more people turned to gold loans to overcome financial difficulties. Soaring gold prices further boosted the sector. This has led to a flurry of NCD issues from Kerala NBFCs to raise additional funds for operational strengthening and expansion.
According to the SEBI data, in 2023–24, there were 17 Kerala-based NBFCs among the 45 in India that issued NCDs. In the past five years, around 15 Kerala NBFCs have regularly issued NCDs annually. So far this year, 11 NBFCs from Kerala have issued NCDs. With its latest NCD, Kosamattam Finance Ltd has launched 32 issues over the years. Interestingly, most NBFCs often had to exercise the green shoe option to raise additional amounts due to high demand.
The rising popularity of NCDs in Kerala highlights a shift in investment preferences, driven by higher returns and trusted gold-backed NBFCs. By meeting capital needs and reshaping savings habits, NCDs are set to remain a key player in the state's financial growth.