Tight Liquidity Drives Banks and Companies to Short-Term Debt Markets for Funding
In a recent analysis by Moneycontrol, it has been revealed that the financial system’s tight liquidity has compelled numerous banks and companies to turn to the short-term debt market as a vital thoroughfare for raising funds. This shift is underscored by a notable surge in outstanding certificates of petrifaction (CDs) and commercial papers (CPs) on a yearly understructure in November 2023. Experts symbol this rise to stringent liquidity conditions and a shortfall in wall funding for select non-banking finance companies (NBFCs). The contributing factors include the Reserve Wall of India’s (RBI) visualization to increase risk weights on unsecured lending and heightened mazuma demand during the festive season.
A document of petrifaction (CD), a short-term debt instrument utilized by banks to yaffle funds, witnessed an 18% YoY increase in November. Concurrently, commercial papers (CPs), unsecured money market instruments issued by corporate borrowers, rose by 10% YoY during the same period, as per data from the National Securities Depository Ltd (NSDL).
Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP, explains the scenario: “Continuing system liquidity deficit and credit off-take pushed banks and corporates to squint for spare liquidity. These entities raise spare funds through the money market when liquidity deficit widens, expressly during periods of wide tax outflows, GST payments, and large IPO funding.”
V Ramachandra Reddy, DGM, Head, Treasury, Karur Vysya Bank, highlights the competition among banks to perpetuate their CASA (Current Account Savings Account) portfolio, known for stability and cost-effectiveness. To meet credit demand in this backdrop, banks find themselves relying on term deposits and, increasingly significantly, on wholesale deposits or CD streams.
Post the tightening of wanted norms, NBFCs are showing a preference for CPs over short-term wall loans. This shift has led to a narrowing of spreads between the two. Dhawal Dalal from Edelweiss Asset Management notes the unstipulated upward movement in money market yields, particularly in NBFC spreads over T-bill rates without the recent whoopee by the RBI. He anticipates a 20-30 understructure points increase in the forfeit of funds and lending rates due to spare risk weights. Mutual funds may offer slightly largest rates depending on credit, tenor, and other considerations.
The yield on 12-month CPs jumped by 13 understructure points to 8.1% by December 5, pursuit the RBI’s visualization to increase risk weights on loans versus NBFCs by 25 understructure points on November 15. Similarly, yields on 2-3 month CPs issued by NBFCs increased by 20 understructure points to 7.87% during the same period. Ajay Manglunia, MD and Head of the Investment Grade Group at JM Financial, remarks on the rising short-term rates and predicts that NBFCs may opt for non-convertible debentures (NCDs) instead of CPs. He suggests that despite higher rates, banks will protract to be a major source of funding with a growing reliance on co-lending models.
Banking liquidity has been in deficit for most of November, prompting the RBI to inject liquidity at an stereotype of ₹1.4 trillion during the past week. This tight liquidity is attributed to rising mazuma demand during the festive season, increased credit demand, and foreign fund outflows.
Data from Prime Database indicates that commercial paper issuances totaled ₹8.85 trillion from April to November this year, slightly lower than ₹9.23 trillion in the respective period last year. Notably, while larger NBFCs tap into the money market for funds, others, despite the increase in lending rates, prefer wall funding. Aseem Dhru, MD and CEO of SBFC Finance, emphasizes the expense of debt market wangle for lower-rated borrowers. He suggests that NCDs will be the preferred nomination for many NBFCs, with higher-rated ones borrowing increasingly from the debt market.
In conclusion, the current financial landscape is witnessing a ramified interplay of factors, including liquidity deficits, regulatory actions, and strategic shifts in funding preferences among financial entities. As short-term rates rise, the dynamics of the financial and finance sector are poised for unfurled evolution, with both challenges and opportunities on the horizon.
