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NBFCs stare at a liquidity squeeze amid debt fund outflow, low bank funds

NBFCs stare at a liquidity squeeze amid debt fund outflow, low bank funds


Non-banking financial companies (NBFCs) are staring at a liquidity squeeze wrought by an outflow from the debt funds and reduced banking system funding.

With banks witnessing a multi-year high credit demand and chasing deposits, the lending cost for non-bank lenders with 3-5 year corporate bonds yields have risen 120-160 basis points since March.

A basis point is a hundredth of a percentage point.

“Borrowing costs have definitely risen, but anecdotally we hear that the lower rated non-banks are facing funding issues. But it could be temporary due to the high credit demand period. We will have to see how this pans out after the festive period is over,” the CEO of a large non-bank lender said on condition of anonymity.

Besides, marginal cost lending rates (MCLR) of private banks have risen 65-85 basis points since March, leading to a likely compression in net interest margins.

“Depending on the sector you are working in, free flow of liquidity at low cost is not available. Now, you have to pay appropriate cost for those funds,” said R Subramaniakumar, managing director, RBL Bank. “Today all banks have deposit rates around 6%. We have a very large cash economy and converting that into liabilities will take some time.”

The surplus liquidity in the banking system has come down sharply, with overall daily liquidity in the banking system turning into deficit on a net basis at ₹21,800 crore on September 20. The deficit in system liquidity has happened after 2019. The overall durable liquidity has remained abundant at about ₹3.7 lakh crore.

“A tighter liquidity environment could keep wholesale funding costs elevated, although we will have to see how liquidity conditions evolve post-festive season, as September is also a seasonally tight month,” said Param Subramanian, equity research analyst, NBFCs and new banks, Macquarie Group. As per India Ratings, the pressure on system liquidity is likely to continue due to the volatile currency and inflationary pressure from developed economies. The tightness in liquidity for banks is visible in a decline in liquidity coverage ratio and a higher demand for certificates of deposits (CDs) and increasing marginal cost of funds-based lending rates across banks, said analysts.

“For NBFCs, the focus will be on margin stability in the rising interest rate environment and gathering adequate liquidity for managing growth,” said Jinay Gala, associate director, India Ratings and Research. “There could be a rise in short-term borrowings to maintain the cost of funds. However, it needs to be calibrated with managing asset liability risk.”

The inflow in the debt market, a major funding source for non-banks, has also moderated.


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