Fundraising through commercial papers (CP) rose 22 percent year-on-year in August as corporates preferred this route because bank loans became costlier amid the increase in the marginal cost of funds-based lending rates (MCLR).
“Companies are turning to CPs as an alternative to bank loans, especially for short-term funding needs. CPs offer flexibility and tend to have lower rates compared to bank working capital loans especially for top credit rated entities, making them a more attractive option,” Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP.
Corporates raised Rs 1.40 lakh crore in August 2024, as compared to Rs 1.15 lakh crore in August 2023, and Rs 1.05 lakh crore in July 2024, according to Prime Database.
The top five issuers – Reliance Retail Ventures, National Bank for Agriculture & Rural Development (NABARD), Reliance Industries, Reliance Jio Infocomm, and ICICI Securities – raised 30 percent of the overall funds.
Reliance Retail Ventures raised Rs 13,275 crore, NABARD Rs 9,700 crore, Reliance Industries Rs 7,000 crore, Reliance Jio Infocomm Rs 5,825 crore, and ICICI Securities Rs 5,685 crore, according to the data.
Companies raised Rs 6.26 lakh crore between April and August 2024, a 7.2 percent jump over Rs 5.84 lakh crore garnered between April and August 2023.
V. Ramachandra Reddy, Head Treasury, The Karur Vysya Bank, said the Reserve Bank of India's (RBI) prudent measures, including the increase in risk weights for lending to Non-Banking Financial Companies (NBFCs) and the requirement for banks to maintain a meaningful Credit-Deposit (CD) ratio, have led banks to moderate their lending to NBFCs. Consequently, NBFCs have been prompted to explore alternative short-term funding options, resulting in an increase in commercial paper issuances.
Increase in MCLR
On September 9, Moneycontrol reported that a few banks raised their marginal cost of funds-based lending rates (MCLR) in September to transmit the RBI's 250 basis points (bps) rate hike and respond to the rising costs and sluggish growth of deposits.
The State Bank of India increased MCLR by 10 bps across tenures, HDFC Bank increased three-month MCLR by 5 bps, and Punjab National Bank hiked it by 5 bps for tenures between one month and three years, according to their websites.
In response to the 250 bps policy rate hike since May 2022, scheduled commercial banks (SCBs) have revised their repo-linked external benchmark-based lending rates (EBLRs) upwards by a similar magnitude.
The one-year median marginal cost of funds-based rate (MCLR) of SCBs increased by 170 bps from May 2022 to July 2024. Consequently, weighted average lending rates (WALRs) on fresh and outstanding rupee loans increased by 181 bps and 119 bps, respectively, from May 2022 to June 2024, RBI said.
The weighted average domestic term deposit rates (WADTDRs), which include retail and bulk deposits, on fresh and outstanding deposits increased by 243 bps and 188 bps, respectively, during the same period, the RBI report said.
Easing yields
The yield on CPs eased around 10 bps in August due to higher surplus liquidity in the banking system, and the expectation of a rate cut.
“The fall in yields on CPs, despite the rise in issuances, can be explained by the ample liquidity in the system and the expectation of an RBI rate cut following global cues like the Fed's anticipated rate cut,” Srinivasan said.
The yield on three months CP issued by NBFCs has eased to 7.55-7.65 percent in August, as compared to 7.65-7.75 percent in July.
Entities are opting for short-term CPs to take advantage of the low yields in the money market rather than locking into long-term debt, anticipating that rates may fall further, Srinivasan added.
Since the last few months, liquidity in the banking system remained in surplus mode due to government spending. This has led to various short-term rates to fall.
To align overnight rates with repo rate, the RBI has conducted various variable rate reverse repo auctions to remove surplus liquidity from the banking system.
The liquidity in the banking system is in surplus of around Rs 1.34 lakh crore as on September 15, as per RBI’s data.
Outlook
Money market experts say that issuances are expected to increase in the coming months.
"This trend is likely to continue in the short term. With ample liquidity in the market, borrowers may prefer to continue raising funds through CPs to meet advance tax and GST outflow needs," said Srinivasan.
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