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Economic slowdown push CP rates, bank credit sharply down in Oct

By Manish M. Suvarna

MUMBAI, OCT 30 (TickerNews Service): Commercial Paper rate fell sharply as liquidity in the banking system surged owing to sluggish credit growth due to economic slowdown.

Indian economic growth touched the six-year low to 5% during Apr-Jun quarter due to weak consumer demand and slowing private investments, which in turn kept most companies away from borrowing long term as well as short term loans that led to a sharp fall in bank credit and yields on commercial papers.

The main cause of slowdown can be attributed to the sluggish consumer demand or failing manufacturing sector, problems in Agriculture sector, rise in number of non-performing assets, Demonetisation and implementation of Goods and Services Tax.

The slowdown of economy has affected most sectors including Agriculture, Automobile, Real Estate, FMCG (Fast Moving Consuming Goods) among others, which forced them to borrow less from banks as well as from the market.

As on Oct 25, scheduled commercial banks credit growth was just at 8.8%, sharply lower than 14.4% a year ago and 10.3% in a month ago period, according to data on the RBI's website showed.

Apart from this, banks have become reluctant to lend to non-banking finance companies after the debt default by the various companies including beleaguered IL&FS, Dewan Housing Finance Ltd and Cox & Kings.

Most companies have defaulted on commercial papers and non-convertible debentures.

Non-banking finance companies have been facing liquidity squeeze after the debt default by the beleaguered IL&FS and its group companies in late August, 2018. The cash crunch and lack of confidence throughout the sector has resulted in sharp rise in borrowing cost for these entities.

As on Oct 31, 2018, rates on commercial papers issued by non-banking finance companies maturing in two-months was traded in the range of 7.85-8.05%, and manufacturing companies' papers was hovering around 7.20-7.35%.

But the confidence over the sector revived after the companies started maintaining their asset-liability profiles, rate cut by the Reserve Bank of India and liquidity in the banking system which turned surplus, that forced rates to fall sharply by around 205 and 250 basis points on-year on papers issued by manufacturing and non-banking finance companies, respectively.

As on Oct 31, 2019, rates on two-month manufacturing companies were quoted in the range of 5.15-5.25% and those on non-banking finance companies were quoted in the range of 5.35-5.45%.

Since January, the Reserve Bank of India has cut repo rate by around 135 basis points for reviving economic growth. Short-term debt market (Commercial papers and certificates of deposit) has seen a sudden transmission of rate cut because the adjustment of rates in the market already takes place ahead of monetary policy.

In second bi-monthly monetary policy review, the central bank stated that the liquidity in the system turned into an average daily surplus of Rs 66,000 crore in early June after remaining in deficit during April and most of May due to restrained government spending.

The central bank injected liquidity of Rs 70,000 crore in April and Rs 33,400 crore in May on a daily net average basis under the liquidity adjustment facility (LAF).

The central bank conducted two open market operations purchase auctions in May amounting to Rs 25,000 crore and a dollar buy or sell swap auction of $5 billion for a tenor of three years in April to inject durable liquidity into the system.

All these factors contributed to sharp fall in rates. Currently, good rated and strong parentage companies are still enjoying lower interest rates in short-term debt market. The rates on these papers are incessantly falling due to strong demand from mutual funds and lower than expected issuances in the market.

Mutual funds, the largest investors in short-term debt papers are witnessing steady inflows into their debt schemes, especially liquid schemes and instead of keeping funds idle they are aggressively investing in commercial papers and certificates of deposit. This is also one of the factors for sharp movement in rates.

Now, the rates on short-term debt papers will be key monitorable due to higher demand from mutual funds and muted supply of papers in the market.

(End)