The days when bank credit was the primary source of funds to corporate India have long gone. The Reserve Bank of India’s (RBI’s) Monetary Policy Report for October 2018 shows that funding from non-bank sources to the commercial sector was more than 5.6 trillion between April and 14 September. In contrast, the central bank’s Weekly Statistical Supplement shows that total non-food credit growth by banks in the current fiscal year up to 14 September was 1.66 trillion. A large chunk of that amount will be personal lending, while farm loans will also be part of it. Clearly, the lion’s share of the funds businesses need is sourced from the non-bank financial sector.

The chart above shows that most of the borrowing was from domestic sources. What’s surprising is that 2.53 trillion, or a bit less than half of the total borrowings from non-banks, was in commercial paper. As the chart shows, it is a marked difference from the position in the first half of fiscal year 2018 (FY18), when commercial papers accounted for just one-tenth of the total borrowing by the commercial sector from non-banks. Indeed, for the last fiscal year up to mid-March, commercial papers accounted for just 6.2% of the funding by non-bank sources, with the largest chunk (17%) being private placements.

This dependence on short-term commercial paper for funds is alright if it was for working capital, but the suspicion is, as in the case of Infrastructure Leasing and Financial Services Ltd (IL&FS), these short-term funds are being used to fund long-term assets. The dependence on commercial papers as a source of funds also explains the fear in the market after the IL&FS implosion.

RBI’s latest financial stability report pointed out that “AMC-MFs were quite active in the money markets (particularly commercial paper and certificate of deposits markets) with about 45% of their receivables being short-term in nature". That accounts for the panic in mutual funds when there were large-scale redemptions from liquid funds. Note though, that the chart shows funding from non-banking financial companies (NBFCs) was much lower in the first half of FY19.

The financial stability report also said that as of March 2018, 22% of total borrowings of NBFCs were short-term in nature, with commercial papers accounting for more than half of these short-term funds.

What is perhaps of more concern, given the long-term nature of their assets, is that short-term funds accounted for 26% of fund-based limits of housing finance companies and commercial papers accounted for almost 60% of that.

Given that the latest data is showing a spike in funding from commercial papers in the first half of FY19, it is likely that the share of commercial papers has increased after March.

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