CORPORATES TURN TO COMMERCIAL PAPER AS BANK LOANS TURN COSTLY

The commercial paper market is seeing more issuances as corporates prefer this route to bank loans for short-term funds.

With interest rates moving up and banks not lending below Base Rate, companies find it cheaper to raise funds through the CP route. By rolling over a three-month CP, companies are able to access funds for up to a year and avoid borrowing from banks.

Investors in CPs are mainly banks as it is a short-term investment which they can sell in the open market. Banks also do not have to worry about default unlike in case of a loan. Mutual funds also invest the corpus of their short-term liquid and ultra liquid funds in CPs.

According to the treasury head of a public sector bank, it is possible for a good company, not necessarily a top notch one, to raise funds through a three-month CP at around 10.25 per cent. For a bank loan of similar duration, the lowest available rate would be around 10.75 per cent (which is the Base Rate for most public sector banks).

Following the hikes in key short-term rates by the Reserve Bank of India, the modal Base Rate of banks increased by 125 basis points to 10.75 per cent in the first half of 2011-12.

“The CP market is seeing more activity since Base Rates of most banks have increased above the comfort level of clients. CPs are available at 50-60 basis points below the Base Rates of most banks and hence are every attractive for corporates,'' the bank official said.

In fact, top rated corporates like oil companies are able to raise funds in the CP market at rates between 8.75 and 9 per cent, which are way lower than banks' Base Rates, said another bank official.

Another reason why corporates, especially public sector undertakings, have turned to the CP market is that banks are consciously looking at shedding their short-term loans, as most of them were given at sub-prime lending rates and, hence, were low-yielding.

Corporation Bank reduced its share of bulk and short-term advances from 23 per cent to 14 per cent, as margins were low.

The bank saw a decline in margins as the yield on advances did not grow at the same rate as the cost of deposits, said Mr Ajai Kumar, Chairman and Managing Director, Corporation Bank.

In a recently held analysts' call, Mr J.P. Dua, CMD of Allahabad Bank, said the bank has discouraged short-term loans as these are always low-yielding. The short-term loan portfolio for the bank has come down by 50 per cent in the September-ended quarter.

Union Bank of India has also decided to reduce its short-term loans, said Mr M.V. Nair, CMD. “We are trying to re-balance our portfolio and focus on retail loans,'' he said.

SOURCE: http://www.thehindubusinessline.com/industry-and-economy/banking/article2601218.ece