Investors prefer shorter maturity papers.
The raising of funds through commercial papers (CPs) has surged within a month of the country’s banks shifting to base rates (the new benchmark for pricing loans in a transparent manner).
In July, companies raised Rs 25,889 crore through CPs, a short-term money market instrument. This was almost double the Rs 13,321 crore garnered in June, according to the latest Reserve Bank of India (RBI) data.
It was the introduction of the base rate from July that spurred the issuances of CPs in the market, according to Rajan Mokashi, deputy managing director, CARE. Under norms for base rate, a bank cannot lend below its base rate to any borrower. Therefore, companies have been resorting to CP issuances as a tool to procure loans at sub-bank rates.
A senior State Bank of India official said his bank had invested in CPs worth over Rs 4,000 crore in the July-August period. While bankers and rating agency executives do acknowledge the rise in issuances in the CP market, they have a word of caution for those expecting the trend to continue in future.
Being a short-term financing instrument, the interest rate for CPs are quite sensitive to liquidity conditions. With RBI raising key policy rates and tightening of liquidity in the system, raising short-term funds is going to be a costly affair, according to the head of treasury with a large public sector bank.
The lower end of interest rate band for issuing CPs increased from 3.85 per cent in early April to 6.10 per cent in early August, according to RBI data. However, the increase at the upper end was not as sharp. A CP in April could be issued in the range of 3.85 per cent to 8.40 per cent, which rose to 6.10 per cent and nine per cent in early August, according to RBI data.
Besides RBI’s norms, the market for short-term paper has also been impacted by the Securities Exchange Board of India’s directive to mutual funds on investment by short-term debt schemes. From August 1, mutual funds – key investors in short-term paper – have to mark-to-market their investment portfolio of short-term debt schemes. Hence, the focus has shifted to a very short-term horizon.
Things may slow down
The coming months may not see a similar level of activity as the SBI official apprehends that RBI may also come up with rules that would make it tougher to invest in CPs below base rate. Ashish Ghiya, MD at Derivium Capital & Securities, which arranges CPs, said the maturity of a CP has shortened to less than 90 days from the earlier 180 to 270 days.
Perhaps, this has also given rise to a trend of rolling-over the paper. Often, a 45- to 90-day paper is reissued as a fresh paper on maturity. This has made it complicated to find out how much fresh funds are being raised and how much is generated from a rollover of previously issued papers.
Large-sized companies, which tapped the market regularly, have increased the frequency of CP issuances. Medium-sized companies are yet to make a debut, Ghiya pointed out.
Rating agencies and finance companies that arrange issuances had made a presentation to companies working in cities other than the metropolitan centres.
