A series of rate hikes by the Reserve Bank of India over the last 18 months has forced India Inc to rely more on commercial papers (CP) than banks for short term funds. In the first five months of 2011-12 (April to August),the volume of CP issuances has risen 83 per cent over that in the same period last year. CPs are unsecured debt instruments issued by companies to meet their short term fund requirement. Their maturity period is less than a year. According to the data sourced from credit rating agency CRISIL,CP issuances between April and August 2011 stood at Rs 2.31 lakh crore compared with Rs 1.26 lakh crore during the first five months of the previous year. The outstanding CP amount stood at Rs 1.49 lakh crore at the end of August 2011. Bankers said most large corporates were not approaching them for their short-term funding needs. Almost all big corporates are raising funds through CPs since we can't lend them below the base rate, said a senior banker with the State Bank of India,the country's largest bank. Analysts said the interest differential benefit is the key reason for companies preferring CPs to working capital loans from banks. CPs are relatively more attractive since their cost is lower than bank borrowings. The minimum lending rate for banks is the base rate (ranges at around 10.5-11 per cent) for most banks. Most large corporates are able to raise CPs at a lower rate in August the lower end of the CPs issued was approximately 8 per cent. The CP rate,however,will vary depending on the rating of the company and the prevailing market liquidity position, said Pawan Agrawal,Director,CRISIL Ratings. Another banker said the volume jump in CP issuances is also because mutual funds today can subscribe only to 90 days paper. While the corporate borrowing through CP has gone up,MFs that were earlier putting money in one year paper can now put it only in 90 days paper. Hence,CPs that were issued just once earlier for MFs are now being issued more than once a year. Hence both these factors have led to a rise in the volume of subscription, said the head of corporate banking at a leading private sector bank. With large corporates finding CPs a better option,banks are eyeing business from mid-sized corporates. Since large corporates are not borrowing from banks for the time being,we are looking at emerging borrowers,mid-size corporates and are also evaluating other product offerings, said the SBI official.
