India Inc uses more of CP as loan rates stay high

With bank lending rates still high, the corporate sector is increasingly depending on commercial paper (CP) to meet working capital requirements.

CP issuance in April-November grew 21.7 per cent over a year, while bank credit grew 17.9 per cent in the same period. CP issuance would rise in the fourth quarter, too, said market participants.

CP is an unsecured, short-term debt instrument issued by a company, typically for financing the accounts receivable, inventories and to meet short-term liabilities. The maturities range from a month to a year.

“CP issuance may increase further, as the Street is expecting a repo rate cut in January,” said Arvind Konar, head of fixed income, Almondz Global Securities. Many economists are expecting the Reserve Bank of India to cut the repo rate, at which banks borrow from the central bank, by 25 basis points in the third-quarter review of monetary policy on January 29. Konar says this would result in CP rates falling by 25 basis points from the current levels.

According to merchant bankers, recent CP issuances include L&T Finance’s one-month issue worth Rs 200 crore, Godrej Agrovet’s three-month issue worth Rs 100 crore and Apollo Tyres which raised three-month CP worth Rs 50 crore.

“A few months earlier, too, CP rates were high but it is cooling down, so we started borrowing,” said a treasury head of a non-bank finance company.

This year, economic growth has slowed, so companies resorted to consolidation.

CP issuance still went up because it is cheaper than bank lending rates. CP rates inch up every March, due to a huge liquidity deficit in the system. Compared with the March rates, CP is down 150-300 basis points.

Banks are key buyers of CP but they have taken a cautious stance of late, after defaults in payment by companies such as Deccan Chronicle Holdings, Gammon India and Hindustan Construction Company. They are increasingly investing in CP of only companies with a high credit rating.