Rates on one-year CPs have risen by 120 bps to 8.4 per cent in about four months.
With the gap between the base rates of banks and the coupon on commercial paper (CP) narrowing, companies may again start giving preference to bank loans as CPs get redeemed over coming weeks.
The interest rate on 90-day CP has risen to 7.5 per cent from 6.35 per cent in early June, according to data from IDBI Gilts. Rates on one-year CPs have risen by 120 basis points to 8.4 per cent in about four months. Rates on one-year CPs were around 7.2 per cent in June and 7 per cent in May.
A senior executive with State Bank of India said some public sector oil and gas companies had indicated their preference for moving to short-term loans when the paper comes for redemption, instead of rolling these over. Then, there would be partial increase in dependence on loans, he said.
Most banks have set their base rates in a range of 7.5 per cent to 8.5 per cent. SBI has fixed its at 7.5 per cent.
Rates on CP had hardened over recent months and were now quite close to the base rates of banks, said G A Tadas, managing director and chief executive officer of IDBI Gilts, a public sector bond house. Tightening of liquidity and a rise in policy rates by the Reserve Bank of India through the first and second quarters has pushed up CP rates. This was prompting some companies to increase their dependence on bank credit, he said.
In July, companies raised Rs 25,889 crore through CPs maturing from three months to a year. This was almost double the Rs 13,321 crore garnered in June. In the first 15 days of August, Rs 17,367 crore was raised through CPs, according to the latest RBI data.
Banks are in the process of assessing funding requirements for the second half of the financial year that begins on October 1, traditionally described as the busy season. Typically, mutual funds, insurance companies and banks, among others, subscribe to CPs. In a scenario of scarce liquidity, bankers say even a partial shift from CPs to bank loans could complicate their calculation for managing liquidity.
Still, the trend of shifting the mode of funding can be disturbed if banks increase their base rates in October. “Any difference of over 50 basis points between base rates and the commercial paper coupon will attract companies to CPs,” said the treasury head of a private bank.
