Banks’ investments in commercial papers (CP) as a share of their total investments hit an all-time high in the fortnight ended August 19, Reserve Bank of India (RBI) data show. At more than Rs 1.06 lakh crore, they account for over one-fourth of the CP market of R3.86 lakh crore. Two years back, this share was barely 10% .
While the CP market has grown at a compounded annual growth rate (CAGR) of 22.1% during the last five years, banks’ investments in this instrument have grown at a CAGR of 47.1%, indicating the significant role banks have played.
The primary reason for banks being in the CP market is that demand for credit from industry has been very lukewarm and negligible. Growth in outstanding credit to the industry in July, for instance, was 0.55% (Y-o-Y). In July 2011, it was 19.7% (Y-o-Y).
Another factor has been faster transmission of rates in the money market.
While the RBI has cut the benchmark repo rate by 150 bps to 6.5% since the beginning of CY15, interest on a three-month CP for ‘AAA’-rated companies has dropped by over 170 bps to below 7%, according to data sourced from Bloomberg. State Bank of India’s base rate during the same period has dropped by just 70 bps to 9.3%.
Similarly, the lowest three-month marginal cost of funds-based lending rates (MCLR) at present at 9% is over 200 bps dearer than three-month CPs for ‘AAA’-rated companies.
Bankers believe that until system-wide credit demand picks up, banks will have no choice but to park their excess funds in instruments such as commercial papers.
“Given ample liquidity in the system and the fact that credit offtake is low, banks have only two options – reduce rates or invest. Since the former is difficult due to MCLR regulations, they are subscribing to CPs in order to retain their top rated clients,” said VS Narang, CFO of BoB.
Karthik Srinivasan, senior VP, ICRA, is of the opinion that banks are not too keen on reducing their MCLRs because that would lower the rates for all their customers and not just the top- rated corporates.
“Given the margins of slightly over 200 bps that most banks are operating at, they can’t afford to reduce their MCLRs to where the CP rates are. Hence, in order to not lose top rated clients, they are increasingly subscribing to their CPs, instead of lending to them directly,” Srinivasan said.