Non-banking financial companies (NBFCs) seem to be making the most of their status as major borrowers from banks. With demand for credit from the industry being lacklustre, not only are they literally forcing banks to invest in their commercial papers (CPs), but are also issuing them at record amounts, an FE analysis of Reserve Bank of India (RBI) and Prime Database data reveals.
While July was the fourth successive month when banks’ lending to the industry grew at less than 1% year-on-year, the month also witnessed the growth rate of their lending to NBFCs hitting a two-year high of over 15.5% (y-o-y).
While NBFCs have issued CPs worth over R1.91 lakh crore so far in FY17, accounting for 49.4% of all CP issuances, banks’ investments in CPs have never been higher.
According to data released by the RBI, banks’ investments in CPs hit an all-time high of R1.07 lakh crore in the fortnight ended September 2 and accounted for well over a quarter of the total CP market.
Bankers admit that NBFCs are forcing them to subscribe to their CPs in return of also borrowing from them. “Most of our large disbursals in the last two quarters have been to NBFCs, primarily retail-focused NBFCs. Given lower rates and the buoyancy in the CP market, we can’t say ‘no’ to them if they ask us to subscribe to their CPs.
In any case, they provide better yields than statutory liquidity ratio (SLR) securities,” a senior executive at a public sector bank said.
Last month, FE had reported how NBFCs are also forcing banks to lend to them at the rate prevalent on the day of disbursal, instead of the rate on the day of approval, in case a bank’s marginal cost of funds-based lending rate (MCLR) drops between the two dates.
Analysts believe until system-wide credit demand picks up, banks will have no choice but concede to demands of their top clients, a position currenly being enjoyed by NBFCs.
Karthik Srinivasan, senior vice-president, ICRA, believes banks are not too keen on reducing their MCLRs because that would lower rates for all their customers and not just top-rated corporates. Instead, they are subscribing to their CPs in order to pass on lower rates only to them. “Given the margins of slightly over 200 bps that most banks are operating at, they can’t afford to reduce their MCLRs to where the CP rates are. Hence, in order to not lose top-rated clients, they are increasingly subscribing to their CPs, instead of directly lending to them,” Srinivasan said.