Stand-By For Growth

While increased liquidity and slower off-take in non-food credit have inspired banks to buy CPs, corporate sector has rediscovered a cheaper way to raise short-term resources. At the current rate of 13 to 14 per cent, and with the added cost of issuance of about one per cent, money raised through CPs is cheaper by at least 3 to 4 percentage points than traditional bank borrowing. Its a win-win situation, with both investors and corporates happy, says a foreign banker. Some corporates are using the CP to reduce their cash credit outstandings, he points out. Insurance companies and to an extent mutual funds are the other major players in the CP market.

 

Liquidity being the key factor, there are expectations that the CP market will see a lot of activity in the near future. Most players expect the liquidity in the banking system to go up as demand for credit shows no sign of picking up. In addition, they expect the Reserve Bank of India (RBI) to adopt measures thatwill encourage the growth of this money market instrument. The stand-by facility for commercial paper, which was removed in October 1994, may soon be restored, feels Ashish Pitale, debt research manager at the ICICI Securities and Finance Company (I-Sec). This may not be an undiluted blessing, though. Restoration of stand-by facility may come along with certain conditions, such as capital adequacy for the corporates issuing CPs, points out P H Ravikumar, executive vice president, ICICI Bank. Earlier, the RBI had relaxed conditions attached to the CP issuance, but now may insist on minimum amount of capital for these companies, he explains. He also expects the minimum duration of the paper to be cut from 90 days as of now to 45 days.

Incidentally, if these changes come about, it would be a second policy reversal in as many years. Having introduced the instrument for the first time in 1991, the RBI went on encouraging its usage by relaxing the parameters. In consonance, the primary CP market kept growing and reached its peak in September 1994 when the outstanding CP amount was a staggering Rs 4,500 crore. Then, in October 1994 credit policy the RBI took a sudden U-turn: it asked banks not to extend the stand-by guarantee to companies issuing CPs. Simultaneously, it also removed the automatic restoration of bank credit limits on maturity of the paper. Apparently, the RBI did this to make the instrument stand on its own merit.

It was the stand-by guarantee and not the credit rating that had inspired the investors confidence in commercial paper, says P A Ananthanarayanan, finance manager, Asian Paints, a company that is a regular issuer in the CP market. With this facility gone, the instrument became riskier for the investors and lost much of its charm. Some banks were willing to offer an alternative like revolving underwriting facility, but at a cost around one to two per cent. Since this reduced the extent of benefit that companies derived from CPs, this did prove to be a success.

Tightening of liquidity s