Banks may have to reveal use of funds raised via CPs

RBI may prescribe higher net worth for firms.

Worried by the sharp rise in commercial paper (CP) issuances in the last one month, the Reserve Bank of India (RBI) is planning to ask banks to inform it about the end use of this money. The regulator is also planning to tighten the norms governing CPs.

RBI officials met primary dealers (PDs) last week in which the issue of high CP issuances was discussed.

According to RBI data, companies reported Rs 11,680 crore CP issuances in the first two weeks in July compared to Rs 16,627 between April 15 and June 30.

A top official of a public sector bank said RBI was worried about the end use of CP funds and wanted to be sure that the money was not diverted to the real estate sector or to the capital market.

Bankers said the regulator might come up with norms under which banks would have to earmark the limit of CPs with working capital loans to companies. “For example, if the working capital limit for a company is Rs 500 crore, banks may have to reduce the limit if the company wants funds by issuing CPs,” said an executive director of a public sector bank.

Central bank officials said RBI might prescribe a higher minimum net worth norm for companies to become eligible to raise short-term money through CPs. At present, companies with a net worth of Rs 4 crore are eligible to raise such funds.

A senior executive of a PD said they preferred mandatory rating of commercial paper by rating agencies to tackle the issue of due diligence. “At present, the scrutiny of the background and the prospective use of funds by companies raising money through CP is less stringent compared to the strict checks done while giving loans,” the executive said.

The CP market got a boost with the introduction of the base rate regime, under which banks were barred from lending below their benchmark rate from July 1. Companies, which were earlier availing of short-term loans for three to six months at 4.5 to five per cent, were faced with a situation where such loans were denied to them because of the regulatory order.

Both banks and companies found a way out in CPs, through which banks can deploy funds for returns which are lower than their base rate. Most banks’ base rate ranges between 7-8.25 per cent.