Auto-Renewal Of Borrowing Limits On Cps Assured

Commercial banks have assured corporates a near automatic reinstatement of borrowing limits on the maturity of commercial papers (CPs) which has lead to renewed interest in these short term instruments.

There are various methods adopted by corporates to ensure that they have the requisite funds to meet the cash outgo on the extinguishing of the commercial paper.

Some banks have assured corporates that their limits will be temporarily enhanced on a short notice to meet the funds outgo.

Another section of banks have been demanding a guarantee fee to keep the limits open to meet the cash requirements on the maturity of the commercial paper. However, this has raised the ire of corporates as it increases the cost of raising funds through commercial paper.

The corporates themselves have turned more prudent, and are not issuing commercial paper up to 100 per cent of their limits. Says S.K. Shelgikar, adviser to the board of directors, Videocon Industries, unlike earlier days when corporates issued CP to the full extent of their limits, now they issue it only up to say 25 per cent. A few days prior to the maturity of the CP, another 25 per cent is issued to meet the cash outflow on account of the extinguishing.

This rolling of funds will ensure that corporates have a constant source of cheap funds. The falling interest rates have prompted many corporates to tap the commercial paper market. Corporates are able to raise funds at rates well below the prime lending rate of banks, which is 14 per cent, through the commercial paper route.

According to an official with Dena Bank, since banks are now flush with funds, they are willing to reinstate limits very quickly. Corporates are told that banks be informed 15 days before the commercial paper matures and they will reinstate the limits.

Bankers point out that none of the banks can now afford not to lend as they are flush with funds. That apart, with the mandatory consortium scrapped, corporates can change banks if they are unwilling to accommodate. Hence, most banks have assured that limits will be either enhanced or reinstated in such way that corporates do not go into a cash bind.

Commercial papers worth over Rs 1000 crore are slated to hit the market in the next few months with the falling interest rates and subscribers willing to pick up the instrument without a stand-by facility.

As of April 15, 1997, the total outstanding commercial papers stood at Rs 705 crore. These three-month papers earlier carried interest rates in the band of 11.3 per cent and 12.5 percent. Now, the interest rates on the 90-day papers are in the range of 10.5 and 12 per cent depending on the profile of the company.