Corporates Issue Cps, Bonds To Return Bank Loans

Blue-chip corporates are returning the funds borrowed from commercial banks out of the money raised through commercial paper and bonds. This has resulted in a fall in bank credit.

Corporates have been able to borrow money cheap directly from the market. Many of them have raised money through CPs at rates less than 13 per cent. Besides, corporates have also tapped the debt market to raise funds, though at slightly higher rates of around 17 per cent. The funds raised through these issues are now being used to repay the working capital funds borrowed from commercial banks.

Says a top executive of a bank: "The whole process was initiated by commercial banks during the tight money market conditions and now it is hitting us."

 

Banks had put a squeeze on credit when the markets were tight in the early part of the current year. For instance, the State Bank of India, the largest commercial bank, had imposed a 15-per cent cut in the quarterly operating limit of its clients in April-June this year, which has now been waived. The result was that many top companies initiated plans to raise funds through other sources.

In the past three months, a lot of corporates have raised the required funds and are now repaying the borrowings from commercial banks. Consequently, banks are now stuck with surplus funds when the credit offtake is already sluggish.

In fact, for the fortnight ended September 13, bank credit fell by Rs 2,035 crore.

Commercial banks are trying to prevent the corporates from repaying their loans by stating that their limits will be lowered and that reinstatement will not be automatic. In fact, for CPs this guideline already exists. The cash credit component in the maximum permissible bank finance is brought down to the extent of the CP issue.

However, corporates going for bonds are not threatened by the banks' stipulation since the money raised through this route is for around five years. Hence their fund requirement will not be immediate.