Indian companies prefer commercial paper route to raise cash, shun banks

Rs 1.9 trn of short-term debt issued in September, against Rs 1.3 trillion in August

Indian companies are increasingly preferring the commercial paper (CP) route to raise working capital, while shunning banks. And this is only going to increase with the liquidity-supportive measures announced by the Reserve Bank of India (RBI), say experts. 

Issues of CPs — those that mature in less than a year —have increased since the nationwide lockdown was announced in March-end, but corporate bonds have not seen such a commensurate rise even as banks’ incremental lending continues to fall.

The data released by the RBI last week showed banks’ loan growth to the industry segment was nil in September. But, on a year-on-year (YoY) basis, banks boosted lending, extending credit mainly to the services sector.

A sign of revival

A total of Rs 1.94 trillion worth of CPs were issued in September, against Rs 1.30 trillion in August.

The data for the October period is not public yet, but till the fortnight ended October 15, companies have raised about Rs 82,000 crore through CPs. For the entire month, the total issue may surpass that of September’s, say experts.  

Joydeep Sen, fixed income advisor at Phillip Capital, says such high issue of CPs is a sign of revival, “because the higher government borrowings are due to higher fiscal deficit, whereas higher corporate borrowings are for business requirements.”

Low yields a reason

There are multiple reasons for such a spurt in CP issues, low yields being the primary one due to easy liquidity policy of the RBI. In some cases, CP yields are even lower than the overnight repo rate of the RBI. This has led to AAA companies raising money from the market in large quantum.  

Non-banking financial companies (NBFCs), however, dominate the corporate bond space, issuing about 80 per cent or more of the papers in that dated segment.

These companies were active in all modes of financing, but after the IL&FS crisis, rollover risk has prevailed and NBFCs have slowly abandoned the method of raising short-term CPs and rolling them over every few months. 

The CP space, unlike the corporate bond space, is firmly controlled by the companies from the manufacturing, industry and services sector.

Enough liquidity in market

“There is liquidity in the market to absorb the enhanced issues. Issue yield levels also are relatively lower than earlier, by virtue of RBI rate cuts, liquidity infusion and other support," said Sen. Any apprehension of increased supply pushing up yields have been addressed by the RBI’s assurance that the liquidity in the bond market would be supported.  

That is also encouraging companies to increasingly issue bonds. Spreads on corporate bonds over government securities of similar tenure has declined to pre-Covid-19 levels by the end of September, said rating agency ICRA.  

“Apart from liquidity infusion measures announced by the regulator since the onset of the pandemic, improved investor appetite for corporate bonds has also supported the decline in the spreads,” ICRA said. 

Corporate bond issue for the quarter ended September was Rs 2.2 trillion, a 53 per cent increase on a YoY basis. The issue in the first quarter was also strong at Rs 2.3 trillion. On an overall basis, the first-half issue of Rs 4.47 trillion was 174 per cent higher than the first half last year.

Fresh bond issues are expected to rise to Rs 8.0-8.2 trillion during FY21, from Rs 6.55 trillion in FY20, ICRA said.