Lending turns attractive, banks turn away from CPs

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Mumbai: Banks have sold about Rs 35,000 crore worth of commercial papers (CP) since mid-September as loaning to companies appears to have become more lucrative than buying their tradable securities.

“Banks are finding it more lucrative to lend to branded nonbanking finance companies (NBFC) instead of subscribing to their commercial papers,” said Mahendra Kumar Jajoo, head of fixed income investments at Mirae Asset Global Investments. “…NBFCs are elongating their average borrowing maturities.”

Bankers and money market players said that NBFCs, which were major issuers earlier, are not going to the market with commercial papers , preferring instead to raise long-term money through bank loans, restricting the scope of rollovers for banks.

Bank investments in commercial papers amounted to Rs 95,160 crore as of March 1, 2019, down from Rs 1.3 lakh crore as of mid-Septermber. This amounts to a fall of 27 per cent.

By contrast, bank lending to NBFCs rose 4.4 per cent, or Rs 24,200 crore, in the third quarter after the IL&FS crisis, compared with a 4.7 per cent decline in the same period a year ago.

In the same period a year ago, bank purchases of commercial papers had risen 11 per cent.

Also, with the liquidity conditions in the market easing, yields on commercial papers have been declining because of which banks are finding it more lucrative to lend to a firm rather than invest in a commercial paper issued by it. While yield on commercial papers of a top-rated firm could be as low as 6.5 per cent, the overnight MCLR (Marginal Cost of Funds based Lending Rate) for a bank could be anywhere between 8 per cent and 8.4 per cent, central bank data showed.

“After demonetisation, market products (securities) were cheaper due to sloshing liquidity,” said Kamal Mahajan, head of treasury and global markets, Bank of Baroda.

“After two years, the scenario has changed with tightening liquidity. Now, companies prefer to borrow through MCLR.” In the absence of credit demand, bank investments in commercial papers had constituted an important source of funding for corporates. With banks pulling out of commercial papers , the growth in total flow of resources to the sector fell to 15 per cent in early March, from 15.6 per cent in early November.

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