Firms raising CPs to exploit banks' deposit hunger

Treasury savvy corporates are taking full advantage of fund-starved banks' drive to mobilise bulk deposits.

Large triple-A (AAA) rated corporates are exploiting the opportunity by borrowing funds to invest in banks' short-term deposits.

"There is a good 50-165 basis point arbitrage window available. Top-rated corporates are raising three-month funds in the commercial paper market at about 5.35-5.75 per cent and investing the same in three-month bank deposits at 6.50-7.00 per cent. This way they earn a clean spread of up to 1.65 per cent," said a corporate treasurer.

In such cases, there is absolutely no risk nor any asset liability mismatch since the tenures match.

The commercial paper market has been active with outstanding volumes of Rs 12,000 crore.

Issuers in the last fortnight include IDBI Home Finance (Rs 30 crore raised at 5.53 per cent), National Housing Bank (Rs 100 crore at 5.35 per cent), Hindustan Construction Co Ltd (Rs 15 crore at 5.90 per cent), GE Capital Services (Rs 75 crore at 5.50 per cent), Dabur (Rs 20 crore at 5.40 per cent), United Phosphorus (Rs 10 crore at 5.58 per cent), among others.

While some of these entities may have had genuine fund requirements, others may have well raised the funds to park it in high-yielding bank deposits. Triple-A corporates which treat their treasuries as profit centres and active in the money market are involved in this activity.

Even public sector enterprises are enjoying the arbitrage, said a banker. However no company is ready to admit to doing so.

Banks such as Uco Bank, Allahabad Bank, various associates of State Bank of India and ICICI Bank are said to be aggressively collecting bulk deposits at rates much higher than the rack rates.

Three-month deposits are fetching returns of over 6.50-7.00 per cent.

"Historically, the interest rate on a commercial paper has been higher than that of a bank deposit. Theoretically that should be the case since a bank deposit is safer than a commercial paper floated by a corporate entity," said Anil Ladha, senior vice-president, I-Sec.

The present gap between the two is too much, he added.

Bankers, however, believe that the arbitrage situation is unsustainable. "It does not make sense. Banks cannot keep borrowing at such high rates and expect to make profits," said the treasury head at a public sector bank.

The incremental growth of credit being faster than that of deposits is responsible for the present situation.