Firms avail of cheap short-term funds

An excess liquidity in the system enabled companies and banks to raise short-term funds through issuance of commercial papers (CPs) and certificate of deposits (CDs) at lower rates during the first half of the financial year.

According to data compiled by the Reserve Bank of India (RBI), companies raised Rs 88,219 crore through CPs, up 46 per cent during the financial year up to September 15, 2009, as against Rs 60,588 crore during the corresponding period last year.

Similarly, the issuances of CDs went up by 70 per cent to Rs 118,510 crore during the first five months, as against Rs 69,587 crore in the corresponding period last year. CPs are unsecured debt instruments issued by corporate to meet their short-term working capital requirements, while CDs are unsecured debt instruments issued by banks.

 

Banks have been raising funds through CDs to meet the shortfall in deposits.

“Banks are neither taking high cost deposits nor bulk deposit. So, at the end of every quarter there is a major shortfall in deposits. Every bank is trying to increase Casa and retail deposits so as to meet their limits by raising funds through CDs,” said Bank of India Chief Financial Officer V K R Agrawal. In addition, there has been some demand for short-term loans. The maturity of the CPs varies from three months to one year, while CDs range from 15 days to a year.

“Companies have used the CP route since there was no strong business outlook. They did not want to commit to long-term loans. Many corporates have rolled back their capex plans. Above all, short-term rates were very attractive during this period,” said Standard Chartered director-debt capital markets, Nishikant Das.

Most companies have raised short-term funds through this instrument, taking the benefit of the soft interest rate scenario and ample liquidity in the system.

Bankers said most of them have raised funds through three-six months CPs. The rate was hovering between 3.50-4.50 per cent during the first half of the financial year. At the same time, the CD rate were between 3.60-8.00 per cent.

Generally, banks, individuals or money market mutual funds buy CPs, a short-term money market instrument issued by companies.

“The short-term rates were much lower than the bank rates. Banks have been issuing CDs to generate short-term liquidity and cost advantage,” said a senior executive of a private sector banks.