Companies bypass banks to raise short-term funds via commercial papers

MUMBAI: Indian banks, which have been reluctant to cut rates despite three rate cuts by the Reserve Bank of India, may find themselves getting bypassed as companies rush to the market to raise short-term money.

Indian companies raised more money from commercial paper in the first two months of the new financial year than in the same period last year with issuances crossing Rs.1 lakh crore. RBI data shows that banks have been raising an average of around Rs.60,000 crore a fortnight through commercial papers compared with an average of less than Rs.45,000 crore in the same period a year ago.

The outstanding stock of commercial paper net of redemption is at a new high of Rs.2.9 lakh crore as of May 15, 2015, up by close to Rs.1 lakh crore from March 31, 2015.

Lower rates are making it attractive for companies to do this. “I think as the commercial paper market interest rates come down, firms are going directly to the markets, especially those who can access those markets, and, thereby, put pressure on the banks to cut their rates,” said Reserve Bank of India governor Raghuram Rajan in his post policy press conference on Tuesday.





Non-food credit on the other hand has risen by around Rs.78,000 crore in the same period.

Commercial paper is rated, unsecured short-term borrowing instrument in the form of a promissory note. These are issued for maturities between a minimum of 7 days and a maximum of up to 1 year, essentially for working capital purposes.

Interest rates on CPs have moved to a range of 8-11.91% from 7.9% to 13% in the same period, compared to bank loans which are borrowed at around the base rate which has been close to 10% during this period. This is an attractive option for poorly rated borrowers who don’t have access to cheap bank credit. “There is a lot of investment interest in CPs among mutual funds,” said NS Venkatesh, CFO and executive director, IDBI Bank. “Issuers, mostly manufacturing companies, are finding this instrument more attractive as yields at around 9% for top-rated corporates work out to be cheaper than bank lending rates.”

For MFs investing in CPs is attractive with yields hovering around 9% as against little less than 8% on government bonds. Interest rates at the upper end of the band are falling. This implies that rates for not so well rated companies are falling, said a senior bank official.

“Interest rates were coming down even before the first rate cuts. Banks will have to figure out whether they keep their margins right now and lose their market share or they want to cut their margins and gain market share,” Rajan said.