Even as systemwide liquidity has improved, lower-rated companies are still finding it difficult to raise funds as credit costs for them have risen sharply in the last six months. Sources said heavy borrowings by public sector companies and aversion in bank lending to non-banking finance companies (NBFCs) are other reasons liquidity remains an issue for lower-rated companies.
The credit spread in borrowing between higher rated and lower rated companies has widened in the last six months. This is one of the reasons banks are unable to pass on benefit of lower interest rates. Despite the Reserve Bank of India cutting rates by 25 basis points, banks have not reduced their lending rates.
Easy availability of liquidity continues to be a challenge
Despite a number of measures by the Reserve Bank of India and the government, easy availability of liquidity continues to remain a challenge for companies with lower credit ratings. Credit costs for such companies have also risen in the last six months, despite the RBI cutting policy rate and indicating the need for better interest rate transmission. Heavy borrowings by state-owned companies as well as risk aversion towards sector such as real estate and segments of non banking financial companies (NBFCs) are being seen as among the reasons for tighter credit conditions.
A $5 billion rupee-dollar swap window by the Reserve Bank of India has improved system-wide liquidity but haven’t resulted in easing of lending rates. “System liquidity is not as bad as it was three months back, but it’s not that every institution is getting money. While NBFCs operating in retail segment are getting money, many are still struggling,” said Amit Tripathi, Chief Investment Officer-Fixed Income, Reliance Mutual Fund. As NBFC funding has reduced, it is having an impact on consumption-linked sectors such as automobiles and consumers goods among others.
Another reason liquidity is not easily available is heavy borrowings by state-owned companies. To ease pressure of government’s market borrowings, many PSU are funding their capital expenditure by borrowing directly from the market. Industry sources said instead of line ministries raising funds to support capex, PSU companies such as IRFC and NHAI are directly raising funds from the market. “So there is both crowding out of private funding as well as risk aversion that has been persisting since IL&FS started defaulting on debt papers. Both these factors mean liquidity is not easily available in the market,” a banking industry official said.
The government Friday announced plans to borrow nearly 62.3 per cent of its next year’s gross borrowing in the first six months of the fiscal. The government will borrow Rs 4.42 lakh crore in first half (April-September) of fiscal 2019-20. It total borrowings will be Rs 7.1 lakh crore in 2019-20.
These factors also mean that banks are unable to cut their lending rates, even though the RBI has changed the monetary policy direction towards a lower interest rate regime. The Monetary Policy Committee of the RBI is meeting next week to take a call on policy rates and other developments. Housing sector is another area where risk aversion is still persisting. Despite some easing in credit conditions after the IL&FS crisis, real estate companies continue to find it most challenging to raise debt. “Real-estate loans may be a casualty if the current risk aversion towards non-bank financial institutions persists. The liquidity squeeze – following the default of a large non-bank in September 2018 – has eased but rollover risk for real -estate borrowers persists as they have been heavily funded by non-banks in recent years (7 per cent of total non-bank loans).
Non-banks depend on banks and the debt market for their funding, and account for 7 per cent of total banking-sector loans. Banks’ asset quality can be susceptible (2.3per cent of bank loans to real estate) if the current risk aversion translates to one or two large defaults in the real -estate market,” Fitch Ratings said in its report on banking sector.