The inter corporate deposit (ICD) market is witnessing a shakeout. Despite the financial system being flush with funds and interest rates falling, firms are moving out and volumes are declining, leaving behind a trail of unsatiated borrowers.
Over the last few months there has been a significant drop in volumes and number of players, said Sidharth Kapur, senior vice president of Apple Finance Ltd.
The sharp fall in business over the last few months has forced many ICD brokers to either shut shop or shift focus to other business activities.
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Companies are moving away from syndication of ICDs to bills discounting or are preferring to put their money in debt market instruments and gilts.
Among the leading companies that have moved out of ICDs are Mafatlal Finance and Apple Finance.
According to prominent players, over the last one year ICD volumes have plunged by nearly 50 per cent.
Even the number of deals struck during a day is down to one-tenth of the previous levels.
The ICD market by itself is no longer a profitable avenue for any player in the market, say brokers. The number of deals being struck have come down from 10 per day to hardly one per day. Further, with a drop in business volume, the margin earned by brokers has narrowed from 0.50 per cent per deal to 0.25 per cent, lamented an official from Mafatlal Finance Ltd.
Mounting instances of defaults and delay in payments have also contributed to the depressed state of the ICD market.
Lately, there has been a manifold increase in the number of requests for rollovers and delayed payments, said an ICD broker.
Despite this, fund-flush corporates such as Bajaj Auto, Bombay Dyeing, Larsen & Toubro and Ranbaxy are still lending in the market.
Though the ICD market has slackened due to a reduction in activity, it will not die out as the demand for short term funds will always exist, said Kapur.
Leading corporates, including the Tatas and Birlas, have adopted a strategy of lending money solely to their group concerns thus negating the risk of default, said sources.
Thanks to the excess liquidity in the system, money is easily available to top corporates. It is the fund starved mid-sized companies who are having a tough time raising resources. Meanwhile, the rates in the ICD market have dropped by 100 to 150 basis points following the announcement of the busy season monetary policy.