Commercial papers are back in favour, with issuances surging for the past three months. Companies usually use the short-term debt instrument to raise working capital in case bank lending rates rise.

At last count a fortnight ago, the outstanding commercial paper stock was 5.97 trillion, which was just a shade lower than the all-time high recorded in the preceding fortnight, shows data from the Reserve Bank of India.

Gross issuances have averaged 1 trillion every fortnight since June. The rise in the issuance of commercial papers reaffirms that production cycles are on an upswing after a long time. The recent rise in the banking sector’s credit growth to 12.9% further gives credence to this narrative.

When money market interest rates slip below bank lending rates, companies take advantage of it. The country’s largest lender, State Bank of India, has hiked lending rates twice within one month. Other lenders are likely to follow suit.

At times like this, companies prefer to seek other investors such as mutual funds, which have more liquidity and are willing to invest for yields. Nevertheless, commercial paper rates, too, are rising amid shrinking liquidity.

But there is more to this than meets the eye. It pays to see who is exactly borrowing through commercial papers and why. A large part of these issuances were by non-banking financial companies and housing finance companies, which lend towards consumption. Further, more than 50% of fresh issuances typically go towards refinancing debt, which were raised in the past.

A report by rating agency Icra Ltd last month noted that the surge in commercial paper issuances can also be attributed to the slew of initial public share offerings (IPO), including that of HDFC Asset Management Co. Ltd. Commercial papers are a popular method to borrow with a clear intention to finance IPOs.

Therefore, the surge in issuances merely indicates that commercial papers are winning over bank loans for short-term borrowings due to the benefits of cost.

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