CP issuances by NBFCs hit four-year high

NBFCs are issuing longer tenure CPs now and NBFCs backed by parent constitute almost 80 per cent of the CP volume

The Reserve Bank of India’s mandate to increase risk weights on bank loans given to higher-rated nonbanking financial companies (NBFCs) is spurring quarterly commercial paper (CP) issuances.

CP issuances by NBFCs hit a four-and-a-half-year high of ₹1.2-lakh crore in January-March 2024, a level last seen in July-September 2019. However, this is still lower than the highs of ₹3.1-lakh crore seen in July-September 2018.

CP issuances are also supported by improved investor confidence because of the healthy liquidity, stronger balance sheets, and stable asset quality of NBFCs.

SUPPORTING FACTORS

Malvika Bhotika, Director, Crisil Ratings, said, “While banks will remain the dominant funding source (~43 per cent share currently), NBFCs will look to diversify their resource profile given the increase in risk weights for bank funding. Consequently, the share of CPs is expected to rise over the medium term from the low of around 4 per cent during fiscals 2020-2023. While the share rose ~200 basis points (bps) in fiscal 2024 to 6 per cent, it will remain lower than the pre-pandemic high of ~11 per cent”.

The increase in the CP share in the overall funding mix is not worrisome at this juncture due to three factors.

First, NBFCs backed by parent constitute almost 80 per cent of the CP volume. Even for the other NBFCs, issuances are largely backed by shorter tenure assets such as loans against shares, gold loans, and unsecured loans.

Second, NBFCs are issuing longer tenure CPs now as against the shorter tenures in the past

The proportion of CP issuances with maturities of up to 2 months was just 10 per cent during January-March 2024, compared with 33 per cent in July-September 2019.