Firms tap short-term mart

Companies float CDs, CPs to benefit from lower interest rates.

The short-term money market is buzzing with activity as companies are preferring to raise funds for a smaller duration, even if it means paying a little more, than borrowing long term.
 

SHORT & SWEET
Certificates of Deposit		Commercial Paper
Fortnight ended	Rate of interest (%)	Fortnight ended	Rate of interest (%)
Jul, 6, '07	6.25-9.69	Jul, 15, '07	4.00-11.50
Oct 12, '07	6.87-10.00	Oct 15, '07	7.00-13.00
Jan 4, '08	6.87-9.82	Jan 15, '08	7.35-12.50
Apr 11, '08	8.00-9.72	Apr 15, '08	7.74-10.25
Jun 20, '08	8.62-9.79	Jun 15, '08	8.25-11.60
Jul 4, '08	8.30-10.60	Jul 30, '08	9.00-12.25
Now	10.50-11.40	Now	10.70-12.25
Source: RBI, market estimates

 

According to dealers, the money market is facing tight liquidity conditions and interest rates have gone haywire. “It is better to pay 10-11 per cent for a shorter term of three months to a year rather than offering higher interest rates for a loan of five or 10 years,” said a dealer.

While there has been no major long-term bond issue, barring those from public sector companies, Power Finance Corporation (PFC) and Rural Electrification Corporation (REC), most of the housing companies and manufacturing units are raising funds through short-term papers that are referred to as commercial papers (CPs).

While interest rates for certificate of deposits (CDs) are ranging between 10.50 and 10.90 per cent, interest rates on CPs are 15-20 basis points higher than the CD rates for corresponding maturities. (One basis point is one hundredth of a percentage.) Commercial deposits are short-term papers issued by banks to raise bulk deposits from mutual funds, high networth individuals (HNIs) or companies.

Dealers at banks said many companies that usually went for long-term funds have now have opted for short-term money. The list includes Aditya Birla Nuvo (three months to six months CP at 10.82-10.85 per cent), Vodafone (three-six months) and Tata Tea (looking for funds for six months). Public sector oil marketing company Indian Oil Corporation (IOC) is also raising funds for three months at 11 per cent instead of opting for a term loan. Bharat Petroleum Corporation (BPCL) has raised three-month funds through loans that later got securitised into pass-through certificates. Reliance Communications has also raised one-year funds.

Dealers said most housing companies are now facing a cash crunch since banks, including their parent companies in many cases, are reticent to lend, given the tight liquidity situation and the regulatory prescription of higher risk weights. Most of these companies, which operate as non-banking finance companies, are again flocking to the money market.