Mumbai: Retail investors investing in bonds, particularly of non-banking finance companies (NBFCs), may be in for some good news.

NBFCs are offering higher interest rates as yields head north in the domestic bond markets.

Public sector banks, a source of funds for NBFCs, have their own set of problems, forcing the NBFCs to look at the retail route.

Retail bond issues this fiscal are expected to cross the previous record of Rs 42,383 crore in 2013-14, and a large part of this will be accounted for by NBFCs.

A note from credit rating agency Icra has said NBFCs have accounted for around 40 per cent of the retail bond issues during 2011-18, the rest being tax-free bonds. This fiscal, NBFCs are set to raise over Rs 20,000 crore, which is four times more than the Rs 4,700 crore raised during the previous financial year.

"Reducing liquidity surplus and rising bond yields may require NBFCs to tap retail bond issues during 2018-19 to meet their funding requirements, given the challenges of the banking sector and overseas borrowings.

"Historically, NBFCs have offered 25-75 basis points higher interest rates for retail category investors in their retail bond issues, thereby making the instruments attractive compared with other debt instruments such as bank deposits.

"It may also result in better investor appetite amid limited increase in rates for bank deposits and volatile returns in the debt and equity markets," Karthik Srinivasan, senior vice-president and group head, financial sector ratings at Icra, said.

The projection comes at a time yields on the benchmark 10-year security crossed the 8-per-cent mark (a three-year high) on Friday. It is feared in some quarters that demand for government securities is likely to remain tepid.

However, this is not deterring the NBFCs.

"Typically, NBFCs have relied on diverse funding sources such as banks, commercial papers, NCDs (retail and private placements), overseas issuances and retail fixed deposits for their funding needs. However tighter liquidity conditions, rising bond yields and weak capital position of public sector banks is likely to increase retail bond issuances by NBFCs during 2018-19," Srinivasan added.

He further pointed out that overseas funding, despite relaxed norms from the RBI, was not a viable option because of hardening global yields and a depreciating rupee leading to a higher hedging premium.