The Reserve Bank of India’s proposal to allow non-banking financial companies (NBFCs) to access the term money market could lift market volumes by 40-60 per cent in the first year and potentially double turnover over the next two to three years, treasury executives estimate. The term money market refers to borrowing or lending funds for more than 14 days.
Greater participation is also expected to modestly compress funding spreads, with AAA-rated NBFCs likely to borrow 5-10 basis points (bps) below comparable three-month commercial paper (CP) rates as banks deploy surplus liquidity through bilateral unsecured lending.
The draft directions on call, notice, and term money markets, released last week, propose widening participation beyond banks and standalone primary dealers. Eligible NBFCs, housing finance companies, all-India financial institutions, and companies would be allowed to participate in the term money market, subject to prudential exposure limits. Companies, however, would be permitted only to lend and not borrow.
The move is aimed at deepening the money market, improving liquidity across maturities, and strengthening monetary policy transmission by creating a broader pool of borrowers and lenders. At present, the term money market remains largely confined to banks and standalone primary dealers, resulting in relatively low trading activity despite the rapid growth of the CP market.
“The biggest impact will be on market depth rather than funding costs,” said the head of treasury at a state-owned bank. “Once NBFCs become regular borrowers, we could see turnover rise by 40-60 per cent over the first year. As more participants join, price discovery will improve and liquidity should extend beyond the overnight segment.”
Treasury dealers said highly rated NBFCs are likely to benefit the most. Three-month AAA-rated CP currently remains the primary short-term funding instrument for such borrowers. While term money borrowing is also unsecured, banks may be willing to lend at slightly finer rates through bilateral transactions, as these avoid issuance costs associated with CP and offer greater flexibility for relationship-based lending.
“We do not expect a sharp decline in borrowing costs because the credit risk remains the same,” said a treasury head of a large NBFC. “However, for top-rated NBFCs, term money could consistently price around 5-10 bps below comparable CP rates once the market develops.”
Currently, three-month AAA-rated CP yields trade in the range of 7.75 per cent to 8 per cent per annum.
Market participants said lower-rated borrowers are unlikely to see a meaningful reduction in funding costs initially, as banks’ internal exposure limits and credit assessments will continue to determine pricing. Instead, the reform is expected to improve liquidity and provide an additional funding avenue rather than replace the CP market.
Over the medium term, dealers expect the term money market to emerge as a more active segment of India’s money market, with turnover potentially doubling over the next two to three years if participation broadens as envisaged under the draft framework.
“I believe borrowers will benefit more visibly than lenders. At the same time, if the number of lenders is limited while demand remains strong, lenders will be choosy. Therefore, I expect only the top-rated NBFCs, such as AAA-rated ones, to benefit meaningfully. I also expect an increase in the overall term money market volumes. The term money market is currently very small, but with more liquidity becoming available, the key question is how that money will be distributed among participants,” said Venkatakrishnan Srinivasan, founder and managing partner, Rockfort Fincap LLP.
Treasury executives said that while including NBFCs would broaden the participant base, the impact on overall market volumes would depend on liquidity conditions and appetite for longer-duration borrowing and lending.
The proposed inclusion of NBFCs in the term money market is expected to diversify funding sources for the sector, which remains heavily dependent on bank borrowings, capital market instruments, and securitisation.