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CP redemptions keep NBFCs on edge
Why is it in the news ?
- Commercial papers (CPs) worth Rs.1 lakh crore coming up for redemption by mid-November.
- Non-banking finance companies (NBFCs) and micro-finance institutions (MFIs) are in a quandary on how to tide over the liquidity crisis.
More in the news
- Banks and mutual funds are the main sources of funding for housing finance companies and other NBFCs.
- While banks contribute about 40% of the funding, MFs contribute 30%.
- According to estimates, 55% of NBFC papers with mutual funds have less than 90 days maturity, which could lead to redemption pressures.
- Lack of cash would impact business growth for MFIs in the festive season when loan demand is typically high.
- Anticipating liquidity pressure, micro-finance institutions are meeting their lenders on November 1 to discuss ways to tide over the liquidity crunch.
- While large MFIs have access to bank finance, the mid-sized and smaller ones depend on funds from NBFCs.
- If NBFCs face cash crunch, then that will have a cascading effect on the MFI sector.
Commercial Paper (CP)
- Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note.
- It was introduced in India in 1990 with a view to enabling highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors.
- Corporates, primary dealers (PDs) and the All-India Financial Institutions (FIs) are eligible to issue CP.
- CP can be issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of issue.
- CP can be issued in denominations of Rs.5 lakh or multiples thereof.
Source
The Hindu, RBI.