Companies going back to banks as base rates are lower than prevailing CP rates.
Commercial paper issuances have came down significantly amid tight liquidity and hardening of interest rates. According to latest data by Reserve Bank of India (RBI), the CPs issued during the fortnight ended January 31 were down to Rs11,782 crore from Rs22,908 crore in the earlier fortnight. Interest rates on Commercial Papers (CPs) have gone up to as high as 11 per cent, bringing down market participation.
“In February, the volumes have been pretty dull because of tight liquidity and rates on certificates of deposits inching up. The total outstanding would have gone below Rs1 lakh crore,” said Ajay Manglunia, senior vice-president, Edelweiss Securities.
| ON PAPER COMMERCIAL PAPER ISSUED BY COMPANIES (AT FACE VALUE) | |||
| Fortnight ended | Total amount outstanding | Reported during the fortnight | Rate of interest (%)@ |
| Jan 15, ’10 | 92,363 | 11,503 | 3.15-7.55 |
| Apr 15, ’10 | 83,165 | 12,207 | 3.85-8.40 |
| Jul 15, ’10 | 1,07,755 | 11,680 | 6.02-8.75 |
| Oct 15, ’10 | 1,32,093 | 35,490 | 6.50-10.00 |
| Jan 15, ’11 | 98,913 | 22,908 | 6.60-11.95 |
| Jan 31, ’11 | 1,01,752 | 11,782 | 6.94-12.50 |
| (Amount in Rs crore) @ Typical effective discount rate range per annum on issues during the fortnight. Source: Reserve Bank of India | |||
Banks that usually invest in CPs are not doing so currently. “We are looking for yields more than 12 per cent because we are raising funds at around 10.50 per cent,” said a bond dealer with a public sector bank. The rates on certificates of deposits (CDs) have shot above 10 per cent across all maturities in February. With robust credit growth and high loan rates, banks find loans attractive as compared to investing in CPs.
Participation of primary investors like mutual funds has also come down because of two reasons. “We lose a lot of money in the month of March on account of redemptions so we have limited funds to deploy,” said a fund manager. As CPs are illiquid as compared to CDs, mutual funds restrict their investments to 60-80 per cent in CDs and 20-25 per cent in CPs.
“Also, companies are going back to their banks as their base rates are lower than the prevailing CP rates,” he added. Currently, the base rates for most of the banks are around 9 to 9.5 per cent.
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Corporate houses had turned to the CP market for funds when the base rate was introduced and lending below the prime lending rate by banks was curbed by the RBI.
However, since August-September, the liquidity situation has shifted from surplus to deficit mode. “Customers use the CP market to take advantage of interest arbitrage or interest savings vis-a-vis their bank limits. If money is tight then in many cases the return expectations from commercial paper will go up. I think the CP market is a reflection of short-term liquidity and short-term interest rates,” said Paresh Sukthankar, Executive Director, HDFC Bank.
According to market players, last week Edelweiss Securities raised Rs1,500 crore at 11 per cent while smaller NBFCs like Manappuram finance and Muthoot raised funds at around 12 per cent for three months. CP rates rose by 10-15 basis points in the week ended March 4.