As rates nosedive, NBFCs swarm CP markets to raise ultra-cheap funds

Non-bank financial companies (NBFC) are back in the markets raising funds at ultra-cheap rates as the banking system runs into a huge surplus, but banks are still reluctant to give loans.  

What the banks and other investors are doing instead is investing in short-term commercial papers. Sensing an opportunity to raise cheap funds, companies in the NBFCs sector have moved in, raising three months money at even cheaper than the overnight repo rate of the Reserve Bank of India (RBI). The NBFC sector largely comprises financial institutions, housing finance companies (HFC), NBFCs, and microfinance institutions (MFI).  

In August, the non-banking sector raised Rs 98,742 crore through the commercial paper route, which is the same amount they had raised between April to July. In July, the sector had raised Rs 23,841 crore. Most of the money is being raised by the NBFCs, while HFC and financial institutions are actively tapping into the market as well.  

“Strong liquidity interventions via LAF (liquidity adjustment facility) route by RBI have enabled improved monetary policy transmission. Interest rates on instruments like the 3-month Treasury bill, CP and certificates of deposit have fully priced in the reduction in the policy rate and are, in fact, trading below it in the secondary market,” the Monthly Economic Review of the Department of Economic Affairs for August noted, adding, CP issuances in fiscal 2020-21 is 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, the review said. Oil and gas and NBFC sector dominated the CP issuance market with more than 50 per cent share.  

This infers that the “market financing conditions for NBFCs, which had become challenging, have largely stabilised in the wake of targeted policy measures,” the report said.

It is not just the NBFCs that are taking advantage of the soft yields. Companies from all sectors are tapping the CP market regularly. Business Standard last week reported how companies in both private and public sectors are raising three-month money at lower than the overnight repo rate of the RBI. For instance, Grasim Industries last week raised 3-month commercial papers at 3.30 per cent — way below the overnight policy repo rate of 4 per cent — and even below the RBI’s reverse repo rate of 3.35 per cent.

However, the same enthusiasm is missing in dated (more than a year maturity) corporate bonds. Banks and NBFCs have not been very active despite some big issuances, with most of them limited to a set of investors.

However, bond dealers warn that such a soft rate is not there for everybody. In fact, if one analyses the rating spectrum of issuers, it can be found that most of these issuers are rated AA and above. There is hardly any appetite for papers issued by firms rated below A. For them, bank loans are the only viable option.  

This is true for the NBFC sectors too.  

“To raise bonds, you have to have a rating, and a good rating at that. Most of the NBFCs don’t go for the rating exercise not because they are weak, but because they are small and the rating agencies are not very willing to listen to their business case before handing them a poor rating,” said a senior official of the industry lobby Finance Industry Development Council (FIDC).

Such poor ratings force these smaller NBFCs to approach the banks with whom they have a long relationship. The markets, however, go mostly with the rating alone. However, banks are also not very forthcoming in giving loans to the NBFC sector, other than those highly rated.

RBI Governor Shaktikanta Das had warned banks at the Business Standard Banking Conclave that such extreme risk aversion was self-defeating.