IL&FS Defaults Hit Commercial Paper Market, Oct Sales Dip 65%
Liquidity squeeze and a lack of confidence in fin cos’ short-term papers spark crisis
Mumbai: The liquidity squeeze that has gripped non-banking finance companies (NBFC) has dealt a blow to India’s short-term debt industry. Commercial paper (CP) sales by financial firms, which often borrow from the markets for onward lending to both companies and individuals, have plunged to about a third of what they used to be.
Financial companies sold .₹ 54,113 crore of commercial papers in October, which was 65% down compared with .₹ 1,53,165 crore of average monthly sales in July and August, showed data compiled by Edelweiss. CPs are short-term debt instruments, usually with one, two, or threemonth maturities.
“A crisis of confidence has prevented investors from taking new bets on CPs issued by finance companies,” said Ajay Manglunia, ex- ecutive vice-president at Edelweiss Finance. “The CP market was growing in the past two years as it is a credible source of shortterm funding. (But) the worst may be behind us now, with financial services companies buying back or repaying their liabilities.”
The crisis was sparked in September when IL&FS defaulted on payments. This is among the issues that feature in the row between the central bank and the government, with the latter seeking easier liquidity for NBFCs.
Meanwhile, interest rates have surged about 200 basis points over the two-month period, with AA+ or AA-rated companies experiencing the steepest increases in borrowing costs. At the peak of the crisis in late September, Dewan Housing Finance’s (DHFL’s) debentures worth .₹ 300 crore were apparently sold by a mutual fund at yields touching 11%, significantly higher than the rates at which NBFCs used to borrow money three months ago. To be sure, DHFL and Indiabulls Housing Finance have collectively bought back CPs worth about .₹ 7,000-7,500 crore since September 21.
Among the Sensex stocks which led the gains were auto stocks such as M&M, Tata Motors, Hero Motocorp, Bajaj Auto along with Infosys and Vedanta which gained between 1% and 2%. The BSE midcap and smallcap indices gained 0.80% and 1.19%, respectively.
Among sectors, the BSE Automobile index rallied 1.08% while indices comprising banks, consumption, IT and metals rallied nearly a per cent. Samvat 2074 was the most volatile year with Sensex rallying over 20% between October 2017 and August 2018 before falling 15% in the next two months. “Mid-term market outlook depends on a little bit of luck in terms of oil prices and little bit of sensibility for a stable pro-economy govern- ment at the Centre in the forthcoming general elections in May next year,” said Nilesh Shah, CEO, Kotak Mutual Fund.
“Valuations are currently reasonable compared to last year samvat and, hence, one can expect a decent return.” Though the Sensex gained 8.3% in Samvat 2074, the BSE Midcap and BSE Smallcap index lost 8% and15%, respectively.
The year also recorded one of the sharpest outflows by foreign funds, which sold nearly .₹ 23,000 crore in Samvat 2074. However, domestic mutual funds pumped in nearly .₹ 1.33 lakh crore during this period. “I think the market will do well in coming year because of having already seen the bad things being played out,” said Samir Arora, founder & fund manager, Helios Capital.