Manufacturing companies increase share in CP market

Manufacturing companies have raised their share in the overall issuances of commercial papers (CPs) as they raised short-term funds through this instrument taking the benefit of the soft interest rate scenario and ample liquidity in the system.

These companies have increased their share from 17 per cent last year to 27.9 per cent at the end of March 15, 2009.

“As the benchmark prime lending rate was high compared to the CP issuance rate, manufacturers have raised funds through this instrument to meet the cost of inventory and working capital needs in the downturn,” said a senior executive from a public sector bank.

Although leasing and finance companies continue to be the major issuers of CPs, their share declined to 63.1 per cent of the total outstanding as on March 15, 2009 as against 70.5 per cent a year ago. As the financial institutions faced capital constraints, they raised their share in the overall issuances from 6 per cent to 9 per cent during the period.

Generally, banks, individuals or money market mutual funds buy CPs, a short-term money market instrument issued by companies. The maturity profile of a CP is up to one year.

CP issuances had witnessed a slump for three straight months until December 2008 due to tight liquidity conditions and general risk-aversion in the aftermath of global economic slowdown. Bankers attributed the rise in issuances to banks’ reluctance on lending to non-banking finance companies and housing finance companies.

This was despite the fact that the Reserve Bank of India (RBI) had opened a special window for banks to borrow at repo rate and lend to these sectors. The special window has seen very low response.

Investors, especially banks, generally do not invest in CPs if they are put on a negative watch by the rating agencies as CPs are unsecured advances.
 

Major Issuers of commercial paper (Rs crore)
Category of Issuer	Mar-08	Jun-08	Sep-08	Dec-08	15-Mar-09
Leasing and Finance	24,925	34,957	39,053	27,965	31,528
Manufacturing	5,687	8,150	9,925	6,833	13,925
Financial Institutions	1,980	3,740	3,060	3,257	4,500
Total	32,592	46,847	52,038	38,055	49,953

Demand for CPs has been on the rise, with the total amount of outstanding CPs increasing by about 53 per cent to Rs 49,953 crore as on March 15, 2009, against Rs 32,592 crore during the corresponding period last year, according to RBI data.

The amount outstanding in CPs has been high from June 2008 onwards. But it had dropped to Rs 38,055 crore at the end of December on risk aversion by companies.