Commercial papers fast replacing conventional bank loans

MUMBAI: Commercial papers (CPs) are fast replacing conventional bank loans as the instrument of choice for funding working capital needs, with borrowings through CPs rising 63% this year, being a lot cheaper than bank loans at the moment. Indian firms have raised Rs 1.27 lakh crore (net of redemptions) during April-December this year compared with Rs 78,280 crore they had raised during the same period last year. Outstanding, or total CP stocks, stand atRs 2.34 lakh crore in the market, according to data from the Reserve Bank of India.

Bank loans, on the other hand, have risen by less than 10% year-on-year in the same period, with banks registering a modest pick-up in loan growth in the past few fortnights.

“CPs can substitute only a portion of bank finance. It will keep going up and down,” said B Sriram, managing director and group executive (national banking), State Bank of India. “It’s a matter of how corporates manage short-term fund requirements.

Major bank credit growth comes from project financing… CPs are mostly available to top-rated corporates. Small and medium enterprises may continue to borrow from banks, whether greenfield or brownfield projects.”

But CPs are the flavour only when rates are lower than bank base rates -- below which lenders are not allowed to lend. This isn’t a permanent feature in the market, and last year itself, the picture was quite the opposite. “Last year, CP issuances were costly, quoting as high as 11% in August,” said Ashutosh Khajuria, head of treasury at Federal Bank.

Bank base rates were comparatively much lower.

“This year, however, corporates are finding bank rates higher and have shifted to commercial papers where rates are in decline,” he said.

Market participants reckon that as long as bank base rates remain at elevated levels, this trend will continue -- at least, for the next few months. Companies are now selling 2-3 months’ commercial papers at about 8.60%, about 150 bps lower than average bank base rates. “As long as commercial papers are traded at about 150 bps lower than bank lending rates, companies will continue to tap these cost-effective instruments for their working capital and general shortterm borrowing needs,” said Rahul Goswami, chief investment officer, fixed income, ICICI Prudential Mutual Fund.

While a bulk of these issues is subscribed by mutual funds, even commercial banks have invested Rs 31,000 crore until mid-December.

Latest data from the Securities and Exchange Board of India show that mutual funds have deployed 22.17% of their total debt assets under management atRs 1.75 lakh crore in November compared with 12.87% of their total debt AUM in August last year.

CPs are of different short-term maturities like less than 90 days, 90-180 days, and one year and above.