Though deregulation of petrol prices has cheered oil marketing companies (OMCs), the base rate regime that banks are shifting to is set to raise the cost of short-term borrowings. As a result, the companies are planning to take the commercial paper (CP) route to raise short-term funds.
Banks are also looking to compensate the companies, most of which are rated triple-A, through reduction in commission on services such as remittances and lines of credit.
“We will certainly start exploring the CP route for short-term credit. At least 50 per cent of our short-term borrowings should come from CP,” said a spokesperson of Indian Oil Corporation. A Bharat Petroleum Corporation Ltd (BPCL) spokesperson said the company would now look at short-term instruments like CP, besides non-convertible debentures (NCD) for long-term money if rates were comfortable. Short-term lending accounts for almost half the company’s total borrowing.
“Once the base rate comes into effect, OMCs could look at more NCDs, or CPs for short-term money,” said Karthik Srinivasan, senior vice-president and co-head of ratings agency Icra.
CP rates have started hardening over the past month. According to the official of a public sector bank, in the past month, CP rates rose at least 100 basis points as short-term lending rates rose.
“Today, the three-month CP rate is near 7.2 per cent, close to the base rate of banks. A month ago, it was around 6 per cent.” said an executive of a public sector bank. SBI has kept its base rate at 7.5 per cent, while most other public sector banks have kept it close to 8 per cent.
For banks, too, short-term lending is an avenue to park excess liquidity and address asset-liability mismatch issues.
“CP rates will harden after the base rate. In just one month, they have gone up substantially. Banks will not be too eager for CP, as it will not count in advances’ growth. We may look at giving additional incentives like a cut in commission for remittances or lines of credit,” said an executive of Allahabad Bank.
Over the past year, due to low interest rates, instead of taking term loans for a year or more, OMCs had been taking short-term loans, mostly at 4-5 per cent, said bankers.
CREDIT RATINGS UP
Soon after the oil price deregulation, agencies have raised OMCs’ ratings, which may help them raise funds through CP at a lower rate.
“In the short term, oil marketing companies may look at capital markets, CP or Mibor-linked debentures to raise funds. There might be some increase in cost of funds, but it will not impact these companies’ ratings,” said D R Dogra, managing director and chief executive officer, Care Ratings.
Recently, Fitch Ratings revised HPCL's national long-term rating to stable from negative. At the same time, the agency affirmed HPCL’s two non-convertible debenture programmes of Rs 1,000 crore each at ‘AAA(ind)’. It also revised IOC’s long-term foreign currency Issuer Default Rating (FC IDR) at 'BBB-' and its National Long-Term rating at 'AAA(ind)', thus revising both ratings to stable from negative. Similarly, Icra upgraded the ratings of IOC's bond programme.
