A month after the Reserve Bank of India announced tighter regulations for credit to non-banking financial companies, cost of borrowing for these players has jumped sharply. Banks too are paying more for funds amid tight liquidity conditions in the banking system.
Cost of borrowing for companies, banks and non-banks through commercial papers (CP) and certificates of deposits (CD) has increased 15-25 basis points (bps) over the past month, data from Clearing Corporation of India (CCI) showed. One basis point is 1/100th of a percentage point.
The increase in borrowing costs – particularly in the crowded three-month segment of borrowing – comes after the RBI on November 16 announced new regulatory measures for NBFC credit.
In the primary market for commercial papers (CP), NBFC heavyweight Bajaj Finance raised 91-day funds on December 14 at a rate of 7.90%, 28 bps higher than its previous 91-day CP issuance on November 10 at 7.62%. For Adani Enterprises, the cost of issuing a 182-day CP on December 14 was 20 bps higher than it was on November 10, while Axis Securities shelled out 19 bps more for a fresh 91-day CP issuance over the same period.
“It’s not only the rates in the market, but also in the banking system (driven by liquidity),” said Soumyajit Niyogi, director at India Ratings & Research. “Commercial banks are using the RBI measures to increase lending rates for NBFCs wherever possible.”
On November 16, the RBI announced increases in bank capital requirements for consumer loans and mandated lenders to set limits on various retail segment loans, signalling the central bank’s vigilance on the unbridled growth in these types of advances.
Among other steps aimed at de-risking the credit market, the RBI announced an increase in risk weights on loans given by banks to NBFCs, effectively pushing up capital needs for all classes of lenders. In turn, this has pushed up interest rates for borrowing segments.
The RBI increased the risk weight on consumer credit for banks and NBFCs to 125% from 100%.
“True, rates have hardened, but when compared with the global rates and cost of overseas borrowing in the current conditions, domestic markets are cheaper,” a senior treasury official with a foreign bank said, requesting anonymity. “We could see a shift to local markets.”
NBFCs have indeed seen a sharper rise in borrowing costs than other companies, with rates of interest on CPs issued by them rising 25 bps over the past month as against 15 bps for CPs issued by manufacturing companies, the CCI data showed.
On bank funding through CDs, too, rates have increased by 20-25 basis points, largely due to persistence of tight liquidity conditions.
On November 9, National Bank for Agricultural and Rural Development (Nabard), whose securities are considered to be benchmarks, issued a CD maturing on February 6, 2024, at a rate of 7.29%. Just about a month later, it issued another three-month CD, maturing on March 28, at a rate of 7.55%, the data showed.
In the primary market for CDs, Small Industries Development Bank of India (Sidbi), an all-India financial institution, raised one-year funds at 7.89% on December 14. At present, the central government is borrowing 364-day funds at 7.19%.
