BackFirms using commercial paper more than bank credit
RBI data shows between July and September 2014, companies raised Rs2.90 trillion via CPs, higher than Rs1.62 trillion lent by banks for non-food credit
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Mumbai: Companies shopping for lower interest rates to fund their short-term working capital requirements moved towards commercial paper (CP) in the quarter ended September, data from the Reserve Bank of India (RBI) shows.
Between July and September 2014, the second quarter of the fiscal year, companies raised ₹ 2.90 trillion via CPs, higher than the ₹ 1.62 trillion lent by banks for non-food credit in the same period, data from the RBI shows.
This is the second consecutive quarter when CPs have outstripped bank credit after companies raised ₹ 2.62 trillion through CPs higher than the ₹ 1.11 trillion disbursed by banks as non-food credit.
CPs are short term instruments which companies use to raise money for 12 months or less. The maturity of these instruments ranges from a few days to 12 months depending on the borrower’s needs.
Bankers say demand for CPs was higher because short-term rates eased during the period, making it cheaper for companies to borrow by issuing CPs. The resulting shift away from bank credit has also been one of the reasons for slower offtake in bank credit this fiscal year.
Bank credit growth has been languishing at 11% in the first half of this fiscal year, much lower than the 17.7% growth recorded in the same period of fiscal year 2013.
“Money market rates have collapsed, but bank base rates have not come down, which means it becomes cheaper for companies to issue CPs. This is one of the reasons why credit growth has not picked up," Shenoi said.
Data on the RBI website shows that interest rate on CPs ranged between 7.36% and 12.62% during the quarter ended September.
Rajat Monga, chief financial officer (CFO) at Yes Bank Ltd said that companies, particularly the higher rated ones, preferred commercial paper just because it was cheaper. Higher rated companies find it easier to raise funds through the commercial paper markets because the perceived risk of default is lower.
“Commercial papers were available at a lower yield compared with bank credit. Bank base rates are at more than 10% even now, they are yet to come down, whereas yields on short term papers have already started coming down last quarter which meant that the difference between loan rates and yields on short term papers was more than 1%; so top rated companies which have access to these markets preferred them to loans," Monga said in a telephone conversation.
Base rates, or the minimum rate below which banks are not allowed to lend, are yet to fall below 10% even though expectations of a rate cut from RBI have increased. State Bank of India (SBI), HDFC Bank Ltd and ICICI Bank Ltd currently have the lowest base rate at 10%.
Last month, Axis Bank Ltd became the first bank in 15 months to cut its base rate by 10 basis points (bps) to 10.15% from 10.25%. One basis point is 0.01 percentage point. Some banks have already started reducing deposit rates in select maturities which could be a precursor to lower base rates.
“Debt markets are competitive and large companies with access to the markets are raising money which means there is pressure on banks particularly from high-end borrowers to reduce rates," Monga said while speaking to reporters during the bank’s second quarter results on 30 October.
However, bankers say the gap between borrowings via the CP market and bank credit is an aberration which may correct itself once bank interest rates come down.
“It is a one-off phenomenon. CPs can in no way substitute bank credit. These are only for short-term purposes. Companies tap them for their requirements in addition to bank credit and it will remain that way," said N.S. Venkatesh, treasurer at IDBI Bank Ltd.
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