Cps Soar On Stamp Duty Differential
The differential in stamp duty on commercial paper and low short-term interest rates has resulted in the money market instrument becoming the focus of attention for corporates as well as banks.
CP volumes are moving northwards as a fall out of RBIs April monetary policy where the apex bank signalled easing of interest rates. However, this has happened against a trade off with bank commercial credit, which has been falling. Money market sources say that since there is no fresh demand from corporates, funds raised via CPs is for liquidating high cost bank funds and not for working capital requirements.
CPs issued by corporates have risen to Rs 977 crore on May 15 as against Rs 702 crore on the day of credit policy announcement. As against this, commercial credit has shrunk to Rs 2,68,105 crore on May 23 from Rs 2,72,365 crore on April 11. Bank treasury heads say that CP volumes have risen due to the profit-sharing opportunity available in the stamp duty between the ones levied on banks and the general public. Besides, arbitrage opportunity between bank interest rates and the southward movement in CP rates has also fueled the increase in CP volumes. Since April 15, cost of funds through the CP route is in the band of 7.7 per cent to 12.3 per cent with lower interest rates for AAA rated companies. As against this, nationalised bank PLR is in the band of 14 to 14.5 per cent plus a spread of 3.5 to 4 per cent takes the actual interest burden on loan to around 18 per cent.
There is no fresh demand from corporates but merely a change in their debt portfolio. It is clearly a situation where funds are raised through the CP route to repay high cost bank funds. Overdraft or loans are being repaid by market borrowing programme by the corporates, said a senior treasury official with a nationalised bank. Savings on stamp duty is shared by all the parties to the contract in the form of yields, the official said.
Apart from the corporate availing funds by issuing CPs, the bank discounting the CP and the bank which raises CP on behalf of the corporate have emerged as gainers. Several mutual funds have emerged as aggressive investors in CPs on account of the carrot of stamp duty differential, say money market sources.
The bottomlines of the banks who were members of the consortium are badly hit as the corporates are essentially repaying high-cost funds by borrowing cheap through the CP route. Pre-mature loan repayments result in asset-liability mismatch for us. However, this is a temporary situation. Commercial credit would pick up as the interest rates at the short-end have bottomed out and the huge differential between CP and bank lending rates which have been over 8 per cent during the past two months will narrow shortly. This should lead to a rise in bank credit, said a foreign bank treasury head. Arbitrage game between bank credit and CP has increased because, unlike certificate of deposit (CD) which has a lock-in period of minimum 30 days there is no lock-in period for the CP instrument. The Stamp duty on the CP is levied as per the Article 13 of the Indian Stamps Act.