RBI action leads to rise in commercial paper rates

The Reserve Bank’s concern about runaway growth in unsecured loans and the imposition of tighter regulations for credit for banks and NBFCs has resulted in a rise in the cost of funds for these companies. The Economic Times has reported that all entities are going through a phase of increased cost of funds in the entire ecosystem.

The central bank capped a season of concern for fast growth in the small ticket unsecured loan sector by announcing, on November 16, higher risk weights for these loans. As a result, banks and NBFCs have ended up paying more for funds in a climate of tight liquidity conditions.

Data from the Clearing Corporation of India show that the cost of borrowing through commercial papers (CP) and certificates of deposits (CD) has gone up by 15-25 basis points in the past one month.

According to the report, the borrowing cost has particularly gone up in the three-month segment of.

In the primary market for commercial papers (CP), NBFC titan Bajaj Finance hiked 91-day funds on December 14 at 7.90%. This is a sharp 0.28 percentage point or 28 basis points higher than the earlier 91-day CP Issuance on November 10 which was done at 7.62%.

Adani Enterprises was issued a CP of 182 days at a rate which was higher than that issued on November 10 CP by 20 basis points.

For Axis Securities, the new rate for commercial paper was 19 basis points higher for a tenure of 91 days compared to the CP issued on November 10.

“It’s not only the rates in the market, but also in the banking system (driven by liquidity). Commercial banks are using the RBI measures increase lending rates for NBFCs wherever possible,” said Soumyajit Niyogi, director of India Ratings & Research.

On December 14, a total of Rs 44,284.92 crore of liquidity deficit was reported in the banking system.

The RBI raised the risk weight on consumer credit for banks and NBFCs from 100% to 125% ON November 16. It set increased limits in capital requirements for consumer credit and directed credit-giving institutions to set and follow limits on different kinds of retail loans.

NBFCs have borne the brunt of the RBI’s new directive. They have witnessed a sharper rise in borrowing costs than other companies. Rates applicable to commercial paper issued to NBFCs have risen by 25 basis points. Those applicable to manufacturing companies have hovered around 15 basis points.

However, despite the rise in rates, there were differing views. “True, rates have hardened, but when compared with the global rates and cost of overseas borrowing in the current conditions, domestic markets are cheaper. We could see a shift to local markets,” a senior treasury official with a foreign bank told the newspaper requesting anonymity.

In the market of certificates of deposit, too, rates have gone up by 20-25 basis points due to tight liquidity conditions continuing.

On November 9, a week earlier than the RBI announcement, National Bank for Agricultural and Rural Development issued a certificate of deposit (CD) maturing on February 6, 2024, at a rate of 7.29%. On December 9, Nabard issued another three-month CD, maturing on March 28, 2024 at 7.55%.

In the primary market for CDs, on December 14, Sidbi (Small Industries Development Bank of India), raised funds for one year at a rate of 7.89%. Incidentally, the GoI is raising for funds for a tenure of 364 days at 7.19%.