CP redemptions keep NBFCs on edge

₹1 lakh crore worth of commercial paper coming up for redemption in mid November

With commercial papers (CPs) worth ₹1 lakh crore coming up for redemption by mid-November, non-banking finance companies (NBFCs) and micro-finance institutions (MFIs) are in a quandary on how to tide over the liquidity crisis. The estimate is from two bankers who did not wish to be quoted.

While large lenders are sitting on comfortable liquidity, it is the mid and small NBFCs and MFIs that are likely to face the crunch.

Banks and mutual funds are the main sources of funding for housing finance companies and other NBFCs. While banks contribute about 40% of the funding, MFs contribute 30%.

According to estimates, 55% of NBFC papers with mutual funds have less than 90 days maturity, which could lead to redemption pressures.

Anticipating liquidity pressure, micro-finance institutions are meeting their lenders on November 1 to discuss ways to tide over the liquidity crunch. Close to 30 lenders and rating agencies will attend the meeting, which is convened by the Micro Finance Institutions Network (MFIN). Lack of cash would impact business growth for MFIs in the festive season when loan demand is typically high.

Cascading effect

While large MFIs have access to bank finance, the mid-sized and smaller ones depend on funds from NBFCs.

If NBFCs face cash crunch, then that will have a cascading effect on the MFI sector.

“The small and medium MFIs are facing a bit of a liquidity crunch. They primarily borrow from large NBFCs. So, we have called all the lenders to MFIs to hear their specific concerns and expectation like whether they will charge higher interest rates,” said a top industry official. “Officials from credit rating agencies will also be there to provide their outlook on the sector,” the official said.

Anticipating liquidity crunch, the RBI has announced ₹40,000-crore liquidity infusion in November through open market operations. The liquidity deficit in last fortnight was about ₹1 lakh crore on an average. On some days, the deficit spiked to ₹1.5 lakh crore.

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Printable version | Jul 11, 2020 11:06:21 AM |

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