RBI concerned over CP issues by low-rated firms

The Reserve Bank of India is concerned about an increase in commercial paper issuances by low-rated...

Written by Reuters | Mumbai | Published: August 20, 2010 1:35:21 am

The Reserve Bank of India (RBI) is concerned about an increase in commercial paper (CP) issuances by low-rated companies and is considering a review of guidelines for such paper,sources said on Wednesday.

More companies are raising short-term funds via CPs after the central bank asked banks to declare a base rate and forbade them from lending at a lower rate,bankers and analysts said.

“We are trying to collect data on how many small,low-rated companies have issued CPs. The CP guidelines are very old and the norms like minimum capital requirement need to be revised as they are too less an amount in today’s context,” a central bank official said.

At a recent meeting with primary dealers this week,RBI officials expressed concern on the due diligence done by banks while buying CPs,the source said.

As banks are major buyers of commercial paper,RBI is concerned that they carry the risk of lending to low-rated firms at a lower rate,officials said.

“There was a discussion whether the CPs should be backed by a collateral or guarantee because issuance by small companies have gone up after the introduction of base rate,” said an official who attended the meeting.

The RBI had allowed CP operations in 1990 and had set

the minimum networth at

Rs 4,000 crore.

The central bank asked banks to launch a new lending rate structure for banks from July 1 known as the base rate,under which banks cannot lend below that reference rate. Consequently,cost of funds for many companies have moved up.

“It looks like corporates and banks have found a roundabout way to the base rate concept. This route has got higher risk for banks and obviously a concern for RBI,” said Gaurav Dua,head of research at Sharekhan brokerage.

However,Dua expects banks’ subscription to CPs to come off once credit growth picks up.

“As of now,banks don’t have many alternate avenues other than investments to deploy their funds at attractive rates,” said Dua.

“A one-notch lower company with a rating of A1 has to issue a three-month CP at a minimum 8.05-8.10%,while they will not get a loan below 9%,” said a dealer who deals in corporate debt at a fixed income brokerage.

According to RBI data,CPs issued by companies in the first two weeks in July was up Rs 7,963 crore to Rs 1.08 lakh crore over June end,while it rose by Rs 16,627 crore during April 15 to June 30.

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