Indian firms enjoyed cheaper funds in 2015

Rates of the top-rated commercial papers have fallen 145 basis points (bps) this year, more than the Reserve Bank of India (RBI)'s 124-bp cut, indicating better rated companies enjoyed softer rates, at least for their working capital needs, compared with other customers of banks.

Banks are the primary investors of commercial paper and which indicates they have indirectly passed on the rate benefits to the corporate sector even as on paper, they have lowered their official lending rate by 60 bps. One basis point is a hundredth of a percentage point.

Coupons on AAA-rated three months' corporate papers were at 8.8750 per cent just before RBI started cutting its rates on January 15. The coupon peaked at 9.3125 per cent on February 18, on liquidity concerns, but fell steadily to close at 7.8625 per cent on Wednesday.

Similarly, in the corporate bond market, yields have fallen at least by 30 bps from their peak, whereas the government bond market has stayed more or less at the same level where it was in January. That month, the yield on the 10-year government bond was 7.86 per cent, while it closed at 7.75 per cent on Wednesday, touching 7.80 per cent last week, indicating rates had not moved at all. State Bank of India's base rate is at 9.30 per cent after a 60-basis point cut.

  "Scope for reduction of banks' base rates appears limited, as sovereign bond yields, with almost zero risk, have remained elevated. But corporate bond curves have indeed enjoyed low rates even as they want more," said Soumyajit Niyogi, rates analyst at SBI DFHI Ltd. To push banks to cut their lending rates, RBI recently introduced the concept of marginal cost of funds-based lending rate, so that lenders' incremental deposits, like borrowing from the money markets, get passed on through their lending rates without any delay.

As banks did not lower their lending rates, companies tapped the commercial paper and corporate bond market route to raise funds in the last two years. But the market is still dominated by financial services companies like non-banking finance companies. Including finance companies, the issuances in the corporate debt market were at Rs 4.19 lakh crore in 2015, lower than Rs 4.21 lakh crore in 2014.

Excluding financial companies, issues in the corporate bond market were Rs 1.15 lakh crore in 2015, against Rs 1.34 lakh crore in 2014, data from Bloomberg showed.

The net issuance in the commercial paper market was at Rs 93,150 crore between January and November, data from RBI showed. The amount outstanding in commercial papers was Rs 3,27,380 crore.

Hence, overall, companies including financial ones raised more than Rs 5 lakh crore from debt market through corporate bonds and commercial paper in one year, whereas bank credit in the interim was more than Rs 6 lakh crore, including to retail and agriculture customers.