1. Banks shun CPs, park funds in reverse repo

Banks shun CPs, park funds in reverse repo

Bankers said despite the rise in CP rates, the spread between the one-month CP rate and a longer-term reverse repo (15-day and onwards) is not enough to take on a credit risk of the issuer

By: | Mumbai | Updated: September 16, 2015 1:08 AM

Notwithstanding a better return from commercial papers and a rise in rates recently, banks are choosing to park their excess funds in the Reserve Bank of India’s various reverse repo tenders with subscriptions averaging more than Rs 45,000 crore daily over the last one month.

Bankers said despite the rise in CP rates, the spread between the one-month CP rate and a longer-term reverse repo (15-day and onwards) is not enough to take on a credit risk of the issuer.

Currently, the average reverse repo rate is 7.25% across the variable rate reverse repo auctions that the RBI conducts regularly to mop up excess liquidity.

The rate on a one-month CP is currently around 7.50%, which is a spread of 25 basis points over the average reverse repo rate.

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“It does not make sense for banks to take a credit risk for just a spread of 25 bps. If this spread widens going ahead, we would see increase in investments in CPs,” said Shashikant Rathi, executive vice president and head of capital markets at Axis Bank.

Rathi also added that banks have already piled up CPs over the last 3-4 months and are now going slow on such investments. Data from the RBI show that outstanding investment of banks in CPs was Rs 68,537 crore as of September 4, a rise of Rs 28,000 crore over five months.

Further, investing in a CP would require banks to set aside capital as these investments are reckoned under the credit exposure to companies. “Reverse repo is risk-free and investments in CPs would give rise to capital requirements. So, banks will have to take into account these factors,” said NS Venkatesh, chief financial officer at IDBI Bank.

CP investments of banks are reckoned under the overall credit exposure to the borrower and are linked to the working capital limit of the borrower. Given the rise in defaults by companies, banks are wary of taking additional exposure through investing in CPs. Also, lack of high-rated issuers in the one-month segment has kept banks from investing in CPs, bankers said.

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