Companies opt for direct market borrowings than bank loans

Money markets appear to be doing brisk business at the expense of liquidity-surplus banks, as companies raise working capital through short-term instruments that have seen rates recede more quickly than at lenders after a percentage-point cut in policy rates this year.

Central bank data showed that outstanding commercial paper (CP) issues, net of redemption, rose Rs 1,06,366 crore between end-March and mid-June, compared with Rs 52,260 crore in the corresponding period last year.

In the same period, bank lending rose only Rs 70,005 crore, compared with Rs2.74 lakh crore in the corresponding period, down 74%. An increasing presence of mutual funds in the CP market has made bank financing less attractive, said experts.

“Another key factor is the aggressive re-entry of mutual funds into the CP market. Bolstered by strong inflows, liquid funds and ultra-short duration funds are actively bidding for money market instruments, further driving demand and compressing yields,” said Venkatakrishnan Srinivasan, managing partner, Rockfort Fincap, a fixed-income institutional advisory firm.

“The situation is amplified by the lag in rate transmission by banks, making commercial papers a cheaper and more flexible alternative to working capital loans for many issuers—especially those with high credit ratings,” he said.

Interest rates on CPs ranged between 5.7-12%, down from 7-14% during the fortnight ended January 31- the fortnight prior to the first reduction in repo rate in February 2025 after a prolonged pause.

CPs are unsecured debt instruments with tenor ranging from 7 days to one year and can be issued relatively quickly compared to availing bank loans, making them an attractive source of funding. Also, interest rate transmission is faster in money market debt instruments compared with loans.

The surge in CP issuances is accompanied by a steeper fall in short-term yields relative to the benchmark 10-year paper. Yields on CPs, which are mainly issued by non-banking finance companies, have come down from 7-14% during April-June 2024 to 6-12% in April- June 2025, the RBI data showed.

According to industry executives, the sharp rise in CP issuances is mainly because of the central bank’s pivot to monetary easing—with the repo rate already reduced by a cumulative 100 basis points since February.

One basis point is a hundredth of a percentage point.

In addition, the central bank has frontloaded a 100-basis point cut in the Cash Reserve Ratio (CRR) in phases starting September, significantly boosting system liquidity, which is currently in surplus of more than Rs 4 lakh crore.

The transmission of rates has been slower in bank lending.

One-year marginal cost of fund-based lending rate (MCLR), which is the benchmark for corporate lending, has fallen by only 10 basis points since January, while weighted average lending rate on fresh loans has come down by 12 bps.

One-year median MCLR stood at 8.90% in June compared to 9% before Mint Road began the rate cut cycle, while WALR has fallen to 9.20% in May from 9.32%.