With banks chasing multi-year higher credit demand and deposits, lending costs have risen 120-160 basis points since March with 3-5 year corporate bond yields for non-bank lenders.
One basis point is one hundredth of a percentile.
“Borrowing costs have certainly increased, but anecdotally we hear that lower rated non-banks are facing funding issues. But this may be temporary due to higher credit demand periods. We will have to see that That’s how it is after the festive period. Over,” the CEO of a large non-bank lender said on condition of anonymity.
In addition, the marginal cost lending rates (MCLRs) of private banks have increased by 65-85 basis points since March, leading to a potential reduction in net interest margins.
“Based on the sector you are operating in, there is no free flow of liquidity available at low cost. Now, you have to pay reasonable cost for those funds,” said R Subramaniakumar, managing director, RBL Bank, “Today all banks have deposit rates around 6%. We have a huge cash economy and it will take some time to convert this into liabilities.”
Surplus liquidity in the banking system has depleted sharply, with the overall daily liquidity in the banking system turning into a deficit of ₹21,800 crore on a net basis on 20 September. The deficit in system liquidity has happened after 2019. Overall durable liquidity has remained abundant at around ₹3.7 lakh crore.
Param Subramaniam, Equity Research Analyst, NBFCs and New Banks, said, “A tight liquidity environment may keep wholesale funding costs high, however we will have to see how the liquidity situation develops after the festive season, as September is also a seasonal one. It’s a tight month.” Macquarie Group. According to India Ratings, system liquidity is likely to continue to be under pressure due to volatile currency and inflationary pressures from developed economies. Analysts said the liquidity crunch for banks is reflected in a fall in the liquidity coverage ratio and higher demand for certificates of deposit (CDs) and rise in marginal cost of funds-based lending rates across banks.
“For NBFCs, the focus will be on mobilizing sufficient liquidity to manage margin stability and growth in a rising interest rate environment,” said Jinay Gala, Associate Director, India Ratings and Research. “Short-term borrowing may increase to maintain the cost of funds. However, this needs to be calibrated with the management of asset liability risk.”
Inflows into the credit market, a major funding source for non-banks, have also declined.