In an indication of stabilising financing conditions, fundraising by Non Banking Financial Companies (NBFCs) in the short-term money market has risen nearly 15 times over the last four months. NBFCs raised Rs 63,677 crore in August through the issuance of commercial papers (CPs), a dramatic increase from the Rs 4,275 crore that they raised in April.
In August, housing finance companies (HFCs), too, raised over four times the funds they did in April; and over the same period, fundraising by financial institutions more than doubled.
Any market-wide challenges related to financing, as well as the subsequent stability, are manifested first in the short-term money market. A CP is an unsecured money market instrument that can be issued for maturity periods ranging from seven days to a year. The increasing risk appetite of mutual funds, improved systemic liquidity, reduction in interest rates, and the restarting of economic activity compared to the March-April freeze, are understood to be the major reasons for the pick-up in funding.
“Short-term yields have dropped significantly, making it very attractive for NBFCs to raise funds. Also, there is huge liquidity in the system currently. It is, however, important to note that only higher rated, acceptable names are able to access the CP market at very low rates,” the chief investment officer (debt) of a leading mutual fund said.
NBFCs, however, say that while short-term liquidity has gone up significantly in July and August, it won’t result in credit flow in the economy.
“There is huge liquidity in the system but it is not translating in credit growth in the economy, as I can’t use three-to-six-month money to fund a three-year loan. For credit growth you need long-term money, risk appetite, and liquidity – and this short-term liquidity won’t help. Only NBFCs that feel they can roll over after 3-6 months, are raising funds through CPs,” Rashesh Shah, chairman and CEO, Edelweiss Financial Services, said.
According to latest data from the Finance Ministry, the total funds raised through CPs by NBFCs, HFCs, financial institutions and microfinance institutions rose to Rs 98,742 crore in August from Rs 15,950 crore in April — with NBFCs raising the largest chunk. Another mutual fund industry official said lower rates led to the issuance of CPs after business resumed post-lockdown, with MFs subscribing to CPs in their liquid and short duration funds.
In its monetary policy statement in August, the Reserve Bank of India said that lower borrowing costs have led to record primary issuance of corporate bonds of Rs 2.09 lakh crore in the first quarter (April-June) of 2020-21. “Market financing conditions for NBFCs, which had become challenging, have largely stabilised in the wake of targeted policy measures,” the RBI said.
In April, RBI had announced targeted long-term repo operations (TLTRO) of Rs 50,000 crore to ensure liquidity for NBFCs and microfinance institutions. Under the Partial Credit Guarantee Scheme, several public sector banks approved purchase of bonds and commercial papers issued by NBFCs.
Even as short term fundraising has become somewhat easier for top rated NBFCs, they have sought regulatory relaxations that would allow them to diversify funding sources.
Hemant Kanoria, chairman of Srei Infrastructure Finance Ltd, said regulators must enable more long-term funding options for NBFCs. Currently, banks, which are financial intermediaries, are mainly providing funds to NBFCs, another set of intermediaries, he said.
“NBFCs can be allowed to have access to public deposits with certain control mechanisms to ensure that their resource mobilisation is not totally dependent on banks. The government should also consider creating an institution that would act as a refinancing agency to support NBFCs, much like the National Housing Bank, which supports the housing finance companies,” Kanoria said.
In its economic review for August, the Finance Ministry said that financing conditions for NBFCs have stabilised, along with a reduction of short-term yields in line with measures taken by the RBI.
“Commercial paper issuances in FY 2020-21 are at an all-time high. Effective weighted average yield of CPs has decreased from 5.39 per cent in April to 3.99 per cent in July. Oil and gas and NBFC sector dominated the CP issuance market with more than 50 per cent share. Market financing conditions for NBFCs, which had become challenging, have largely stabilised in the wake of targeted policy measures. CPs yield of NBFCs has softened to reach 3.80 per cent as on July 31, 2020,” it noted.
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