With increased concerns on asset quality amid high lending rates, banks are opting to invest in commercial paper (CP) issued by companies rather than extending short-term credit.
According to the Reserve Bank of India (RBI), banks’ investments in CP have been steadily increasing, from Rs 12,309 crore as on March 25 to Rs 22,447 crore as on October 21.
Most banks have either stopped or are going slow on giving out working capital loans. “There is bullet repayment in working capital loans, which makes it difficult for the borrower to pay off the dues in time when interest rates are high,” said a senior official from Bank of India. CP, on the other hand, is a tradable debt instrument with maturity of up to a year and can be issued by companies to meet short-term funding needs. When in need of liquidity, banks can offload these in the secondary debt market.
Apart from non-banking finance companies and housing finance companies that regularly issue CP, known names such as Indian Oil Corporation, Renuka Sugars, Hindustan Construction Company and Gammon India are tapping the short-term debt market for funds, according to market participants.
“Base rates have hardened over time, due to which companies that have access to the debt market are raising funds at cheaper rates,” said a bond dealer with a domestic brokerage. Presently, companies are able raise funds via CP at 9.6 per cent for three months and 9.8 per cent for six months, while banks are offering loans at 100-200 basis points (bps) above the base rate that ranges between 10 per cent and 10.75 per cent.
Banks with ample liquidity are readily investing in short-term debt instruments instead of locking funds in loans. “We are borrowing from RBI under repo and investing in CP; there is good arbitrage opportunity there. We are not investing in treasury bills,” said the treasury official of a large public sector bank.
CP spreads over comparative treasury bills have narrowed by around 50 bps since the end of the second quarter, as a result of higher demand from investors such as mutual funds and banks. Yields on treasury bills have also shot up on high supply, leading to contraction in the spreads.