NBFCs claim spotlight in hybrid capital market with perpetual bonds

Mumbai, Jul 25

A new funding trend is quietly picking up pace in India’s financial sector. Several Non-Banking Financial Companies (NBFCs)—including government-owned infrastructure financiers like PFC, REC, and IREDA, as well as private players such as Hero FinCorp, Axis Finance, and Hinduja Leyland Finance—have been turning to perpetual bonds since last year to raise long-term capital. These institutions are using this route as a strategic way to strengthen their capital base.

Perpetual bonds differ from regular bonds in that they don’t have a maturity date. This means the funds raised stay with the NBFC indefinitely, functioning more like equity. It helps NBFCs boost their financial strength without diluting promoter shareholding. From the investor’s perspective, these bonds offer higher returns than standard debt instruments, owing to features like call options and step-up interest rates. Typically, issuers exercise the call option and refinance the bonds with fresh perpetuals, thereby offering investors a possible exit route—though this may not always be feasible during periods of financial stress.

Under the RBI’s latest Scale-Based Regulation (SBR) framework, NBFCs in the Middle and Upper Layers are allowed to issue Perpetual Debt Instruments (PDIs) as part of their Tier I capital, up to 15% of their Tier I base. Any amount raised beyond that may be counted as Tier II capital, subject to conditions.

One reason these instruments are gaining traction is their structural simplicity compared to bank-issued AT1 bonds.

Talking to Bizz Buzz, Venkatakrishnan Srinivasan, Founder and Managing Partner, Rockfort Fincap LLP says, “In times of financial stress, NBFC perpetual bonds are often perceived as more stable than bank AT1 instruments. This is because AT1 bonds issued by banks include regulatory features—like the Point of Non-Viability (PONV) clause—which can weigh on investor confidence during uncertain periods. NBFC perpetuals do not carry such clauses, making them more predictable and appealing to cautious institutional investors.”

Another key distinction lies in credit ratings. Even if a commercial bank is rated AAA, its AT1 bond is usually rated one notch lower—typically AA+—because of the higher risk associated with the PONV clause. In contrast, AAA-rated NBFCs have generally retained the same top rating for their perpetual bonds, as long as they follow standard structures without additional risk features. This rating stability has made NBFC perpetuals more marketable, he said.

Recently, PFC raised ₹475 crore at 7.43 per cent, and the issue was oversubscribed nearly six times. With several top-rated NBFCs and financial institutions planning similar offerings, perpetual bonds are fast emerging as a reliable long-term capital tool in the evolving bond market landscape.

EoM.