Cos troubled in raising short-term debt

MUMBAI: The Reserve Bank of India's monetary tightening steps have pushed up interest rates on Commercial Papers (CPs) by nearly three per cent, making it difficult for companies to raise short-term debt for up to one year.

As interest rates on CPs touched 13.5 per cent toward the close of 2006-07, the volume of debt raised through this route slipped to Rs 17,333 crore in March 31, 2007 compared to Rs 24,419 during September 2006, according to the Reserve Bank's monthly bulletin for May.

RBI allows corporates to raise funds by floating a CP for a minimum amount of Rs five lakhs from 15 days to one year after obtaining ratings from credit rating agencies.

Not many corporates were currently raising funds through CPs because of high interest rates, said, Punjab National Bank Executive Director K Raghuraman.

Interest rates on CPs, which were in the range of 7.50 to 9.50 per cent during the fortnight ending November 15, 2006, shot up to 10.25-13 per cent during March 16-31, 2007.

Corporates used to raise short-term funds at 4.5-6.5 per cent depending upon the ratings obtained by credit rating agencies during April 2004 by floating CPs.

Analysts attribute the spurt in interest rates on CPs to the monetary tightening measures announced by the RBI and also suggested rates may be volatile in future.

"CP rates may still be under traction and there will be a premium or discount over the rates banks charge for working capital limits to corporates," said Robin Roy, Associate Director and an economist with PriceWaterhouseCoopers.

Analysts said rating agencies have also in recent past downgraded the ratings for CPs of many corporates, prompting them to look for other options for raising short-term funds.