Indian real estate and other manufacturing companies have stepped up borrowings through issuances of commercial papers (CPs) after the country’s central bank injected liquidity by cutting cash reserve ratio and as banks continue to shy away from extending loans.

Cash-strapped real estate firms are resorting to short-term borrowings of funds to complete ongoing projects as the economic slowdown has virtually halted demand for properties, freezing cash flows.

“Real estate companies have stepped up issuances of CPs even as banks are reluctant to extend loans,” a State Bank of India official said. “Few manufacturing companies have tapped the CP market.”

Real estate companies are borrowing through CPs as they are able to raise funds at cheaper rates compared to bank loans. The public sector banks are lending to their best customers at an average rate of 12.5-13.5 per cent, while non state-run banks lend at rates as high as 17.25 per cent.

Comparatively, real estate companies can raise funds through issuances of CPs at as low a rate as 9 per cent.

The revival of the issuances of CPs comes nearly two months after overnight rate spiralled as high as 22 per cent owing to the acute liquidity crunch. Mutual funds, among the biggest investors in the money market, or short-term instruments, were flooded with redemptions making it difficult for companies to raise funds through issuances of CPs.

Indian companies raised as much as Rs 6,283 crore in the fortnight ended April 15, 2008 through issuances of CPs at a time where interest rates ranged between 7.74 and 10.25 per cent, RBI data showed.

In the last month, mutual funds, after having regained investors’ confidence, stepped up their investments in CPs and other money-market instruments, a treasury official with small private bank said.

Reflecting the sentiments and return of liquidity, banks have also stepped up their investments in CPs and other money-market instruments. Bank investments in CPs have risen 84 per cent in the fortnight ended December 5, 2008 to November Rs 16,275 compared with Rs 15,680 on November 21, the central bank showed.

“At present, banks have abundant liquidity and they are looking for avenues which give better returns compared to the returns on reverse repo,” B A Prabhakar, Executive Director, Bank of India said.

Banks park their surplus funds with the central bank at a rate of 5.5 per cent while investments in CPs offer them a return of more than 9 per cent, RBI data showed.

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