Commercial paper borrowing 1-2% cheaper than bank loans
There has been an increase in demand for money market instruments from mutual funds, because of the increasing size of liquid funds.
By RUCHIRA ROY , ET Bureau | Updated:
MUMBAI: Indian corporates are raising funds through commercial papers to meet their short-term working capital needs as borrowing from banks turn costlier with most lenders increasing base rates.The rate on 3-month P1+ rated CP closed at 9.10% on Wednesday. It had touched a monthly high of 9.77% in June before falling to 8.90% on June 30. Volumes in the commercial paper market rose to Rs 3,441 crore on June 29 from Rs 922 crore on June 2. On Friday, volumes in the CP market stood at Rs 2,541 crore.
“The cost of borrowing through commercial papers works out 1-2% cheap compared with bank credit for corporates due to the prevailing interest rate scenario,” said Nand Kumar Surty, CIO, JP Morgan Mutual Fund. Banks have been prompted to increase their base rates or minimum lending rates as the central bank continues monetary tightening in an effort to tame stubborn price pressures. Vijaya Bank, Corporation Bank and Indian Overseas Bank raised base rates to 10.25%. Dena Bank raised base rate to 10.20%, Canara Bank to 10.25%, ICICI Bank to 9.50%. Most of the demand for commercial papers is coming from mutual funds that are expanding their liquid funds’ portfolios, which invests in shortterm debt papers.
“There has been an increase in demand for money market instruments from mutual funds, because of the increasing size of liquid funds,” Mr Surty said.Banks are going slow in investing in CPs as spreads between certificates of deposits and CPs are hardly attractive, particularly when lenders are flush with funds amid advance tax collections coming back into the system and redemption of government bonds. Government security worth around Rs 37,000 crore was redeemed on July 2.
“Considering the rates and the reserve requirements of banks, they may not be in a position to compete with mutual funds,” said Roy Paul, DGMtreasury at Federal Bank.
“Activity has started converging on the shorter end. The reasons could be a sharp drop in longer-term yields, making it less attractive as an investor. The issuers are not coming forward to issue at the current levels.
“The cost of borrowing through commercial papers works out 1-2% cheap compared with bank credit for corporates due to the prevailing interest rate scenario,” said Nand Kumar Surty, CIO, JP Morgan Mutual Fund. Banks have been prompted to increase their base rates or minimum lending rates as the central bank continues monetary tightening in an effort to tame stubborn price pressures. Vijaya Bank, Corporation Bank and Indian Overseas Bank raised base rates to 10.25%. Dena Bank raised base rate to 10.20%, Canara Bank to 10.25%, ICICI Bank to 9.50%. Most of the demand for commercial papers is coming from mutual funds that are expanding their liquid funds’ portfolios, which invests in shortterm debt papers.
“There has been an increase in demand for money market instruments from mutual funds, because of the increasing size of liquid funds,” Mr Surty said.Banks are going slow in investing in CPs as spreads between certificates of deposits and CPs are hardly attractive, particularly when lenders are flush with funds amid advance tax collections coming back into the system and redemption of government bonds. Government security worth around Rs 37,000 crore was redeemed on July 2.
“Considering the rates and the reserve requirements of banks, they may not be in a position to compete with mutual funds,” said Roy Paul, DGMtreasury at Federal Bank.
“Activity has started converging on the shorter end. The reasons could be a sharp drop in longer-term yields, making it less attractive as an investor. The issuers are not coming forward to issue at the current levels.
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