Commercial Paper Issuances Surge to Four-Year High

The Reserve Bank of India’s decision to increase risk weights on bank loans to higher-rated non-banking financial companies (NBFCs) has led to a significant uptick in quarterly commercial paper (CP) issuances. This, coupled with investor confidence and diversified funding sources, has propelled CP issuances by NBFCs to a four-and-a-half-year high of ₹1.2-lakh crore in January-March 2024.

Increased Risk Weights Driving CP Issuances

The RBI’s mandate to elevate risk weights on bank loans to NBFCs, particularly the higher-rated ones, has spurred the issuance of commercial papers. This regulatory measure has prompted NBFCs to seek alternative funding avenues, resulting in a surge in CP issuances.

Investor Confidence and Diversified Funding

Improved investor confidence, fueled by healthy liquidity, stronger balance sheets, and stable asset quality of NBFCs, has further supported the surge in CP issuances. NBFCs are increasingly diversifying their resource profiles to mitigate the impact of higher risk weights on bank funding.

Expectations of CP Share Increase

Malvika Bhotika, Director at CRISIL Ratings, anticipates a rise in the share of commercial papers in the overall funding mix of NBFCs over the medium term. Despite the increase in CP issuances, concerns remain manageable due to several factors, including the backing of CPs by parent entities and the shift towards longer tenure CPs.