Limited Liquidity Compels Banks & Corporates To Secure Short-Term Financing
Tight liquidity in the banking system has forced many banks and companies to tap the short-term debt market for raising funds, according to a media report.
Outstanding certificates of deposit (CDs) and commercial papers (CPs) rose sharply on a yearly basis in November 2023 due to tight liquidity conditions, and the lack of bank funding for a few non-banking finance companies (NBFCs), after the Reserve Bank of India (RBI) increased risk weights on unsecured lending, and cash demand during the festive season, experts said.
A CD is a short-term debt instrument used by banks to garner funds. A CP, on the other hand, is an unsecured money market instrument issued in the form of a promissory note by corporate borrowers to diversify their sources of short-term borrowings and provide an additional instrument to investors.
According to National Securities Depository Ltd (NSDL) data, outstanding CDs rose around 18 percent on-year in November, and CPs rose 10 percent on-year.
“Continuing system liquidity deficit and credit off-take pushed banks and corporates to look for additional liquidity. These entities raise additional funds through the money market when liquidity deficit widens, especially during periods of advanced tax outflows, GST payments and large IPO funding,” said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP informed the media house.
