Banks and corporates are forced to raise short-term financing due to tight liquidity

 Banks and corporates are forced to raise short-term financing due to tight liquidity

Banks and corporates are forced to raise short-term financing due to tight liquidity

NSDL data shows that outstanding commercial papers increased by 10% year over year in November, while outstanding certificates of deposit increased by around 18% year over year.

Tight liquidity in the banking system has compelled many banks and businesses to turn to the short-term debt market in order to borrow capital, according to a Moneycontrol report.

Due to tight liquidity conditions as well as a lack of bank funding among certain non-banking finance companies (NBFCs), the amount of outstanding certificates of deposit (CDs) and commercial papers (CPs) increased sharply on an annual basis in November 2023. Experts said that the Reserve Bank of India (RBI) had increased the risk weight on unsecured loans along with cash demand during the festive season.

Banks utilize CDs, a kind of short-term loan instrument, to raise money. However, corporate borrowers may also use CP, an unsecured money market instrument issued as a promissory note, to diversify their short-term borrowing sources and provide investors another option.

Data from the National Securities Depository Limited (NSDL) shows that in November, outstanding CDs increased by almost 18% year over year, while CPs increased by 10% year over year.

"Lend offtake and the system's ongoing liquidity crisis forced banks and corporates to search for more liquidity. According to Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP, these institutions obtain extra funds via the money market when their liquidity shortfall develops, particularly during times of increased tax outflows, GST payments, and substantial IPO financing.

Furthermore, Karur Vysya Bank's V Ramachandra Reddy, DGM, Head of Treasury, said that banks are vying to grow their CASA portfolio since it is comparatively more reliable and economical.

In this context, they are compelled to rely on fixed deposits, and much more so on bulk deposits or CD streams, in order to fulfill credit demand.

Furthermore, Reddy said that NBFCs are favoring CPs over short-term bank loans as a result of the tightening of capital standards, which is reducing the difference between the two.

What does data from NSDL say?

As of November 30, 2023, NSDL data shows that outstanding CDs were valued at Rs 3.81 lakh crore, compared to Rs 3.25 lakh crore on the same day in 2022.

Comparably, as of November 30, 2023, outstanding CPs of Rs 3.94 lakh crore were recorded, compared to Rs 3.59 lakh crore on the same day in 2022.

A total of Rs 63,342 crore, Rs 92,426 crore, and Rs 65,640 crore of the CD amount are expected to mature in January, February, and March of 2024.

It is planned for CPs totaling Rs 68,843 crore, Rs 92,172 crore in February 2024, and Rs 43,726 crore in March 2024 to mature.

Anticipated rise in CD and CP issuance

Experts in the money market predict that in the next months, there can be a rise in the issue of CDs and CPs.

According to experts, there are a number of reasons for this, including year-end pressure, interest rate swings, investor preferences, government policy and expenditure efforts, and evolving liquidity situations.

Furthermore, Reddy said that the need for deposits would persist in the next quarter due to the busy lending season, which will start to moderate in April.

Srinivasan said, "We expect these institutions to keep on trying to tap the money market while they may raise 15% to 20% more funds compared to the last financial year. This is based on an analysis of the current market conditions and the emerging capacity situation."

Due to the conclusion of the quarter and the banking system's limited liquidity, yields on CDs and CPs are predicted to increase in the next few days.

Currently, the financial sector is anticipated to be lacking around Rs 2.59 lakh billion in liquidity.

"The yield may increase by 5–10 basis points by the end of the quarter. This would depend on the quantity of variable rate repo (VRR), which may be disclosed later, according to Umesh Kumar Tulsyan, managing director of fund firm Sovereign Global Markets, located in New Delhi.