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Issues of Commercial Paper (CP) by NBFCs reached a four-year peak

Published on April 27, 2024
Current Context: Commercial Paper (CP) issuances by Non-Banking Financial Companies (NBFCs) have surged to a four-and-a-half-year high from January to March 2024.
Issues of Commercial Paper (CP) by NBFCs reached a four-year peak
  • The total value of CP issuances reached ₹1.2 lakh crore, a level last observed in July-September 2019.
  • However, it’s important to note that this amount is still lower than the peak of ₹3.1 lakh crore recorded between July and September 2018.
  • The driving factors behind this surge in CP issuances include:
    • Reserve Bank of India (RBI)'s decision to increase risk weights on bank loans provided to higher-rated NBFCs.
    • Improved investor confidence due to the healthy liquidity, stronger balance sheets, and stable asset quality of NBFCs.
    • While banks remain the dominant funding source for NBFCs (accounting for approximately 43% of funding), NBFCs are actively diversifying their resource profile.
    • Consequently, the share of CPs is expected to rise over the medium term, even though it currently stands at around 6% of the overall funding mix.
  • This increase in CP share is not concerning at this juncture due to several factors:
    • Parent-backed NBFCs constitute almost 80% of the CP volume.
    • Issuances are largely backed by shorter tenure assets such as loans against shares, gold loans, and unsecured loans.
    • NBFCs are now issuing longer tenure CPs compared to the past, with maturities of up to 2 months, as opposed to shorter tenures.

Question:

Q.1 What percentage of funding for NBFCs comes from banks?
a. Around 43%
b. Approximately 20%
c. Over 60%
d. Less than 10%
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