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Norms push NBFCs out of CP market

Commercial paper issuances were at ₹57,065 crore in October 2019, as per data with Prime Database.

, ET Bureau|
Updated: Nov 19, 2019, 10.00 AM IST
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Commercial papers-1200
Cumulative issuances during the first seven months of the current fiscal were at ₹7.78 lakh crore, 7.7 per cent lower than the corresponding period a year ago.
Mumbai: The Reserve Bank of India’s liquidity coverage norms for non-bank lenders have almost driven out the shadow banks from the commercial paper market as the funds to be set aside in relation to the cost of borrowing makes recourse to the instrument unviable for them.

Commercial paper issuances were at ₹57,065 crore in October 2019, as per data with Prime Database. Cumulative issuances during the first seven months of the current fiscal were at ₹7.78 lakh crore, 7.7 per cent lower than the corresponding period a year ago.

In terms of sectoral break-up, NBFCs recorded the steepest decline of 4 per cent followed by decline of 2.25 per cent in case of housing finance companies.

“CP is a dead market now, I don’t think they are going to make a comeback the way they did in the past. Also, the kind of liquidity cover that we have to maintain for short-term loans renders the less than 90-day borrowing completely worthless,” said Ravi Subramanian, MD, Shriram Housing Finance.

CP

The RBI rule prescribes that a percentage of less than 90-day repayments must be held separately in liquid assets. So, if an NBFC borrows ₹100 crore from the CP market, it must keep ₹20 crore in liquid assets, which renders the instrument unfeasible.

The cost of borrowing via commercial papers has seen a significant decline from the peaks touched in mid-2018-19. For non-bank lenders, yields on commercial papers dropped sharply from 8.42 per cent in October 2018 to 5.91 per cent in October 2019.

“The cost of borrowing via commercial papers declined further in October 2019, making it the fifth consecutive month of declining rates. However, the yields have declined marginally, and it has been the lowest decline in the last five months,”

CARE Ratings said in a report, “All CP issuances during the month had a credit rating of A1+ category which means very high degree of safety of lowest credit risk.”

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