State Bank of India’s (SBI’s) investments in commercial papers (CPs) at R41,000 crore now account for more than 10% of the total CP market of about R3.86 lakh crore, senior executives at the bank told FE.
SBI’s investments in CPs have sharply risen over the past five months from just R11,000 crore at the end of March. “We subscribed to CPs worth R25,000 crore in the quarter ended June 2016 and in the following two months, we have added to the portfolio buying an additional R5,000 crore worth of paper,” they said.
Bank officials also said the lender is roughly earning 75 to 100 bps more through CPs than it would have been by investing in government securities.
The banking system’s investments in CPs, as a share of their total investments, remains at an all-time high. According to data released by the Reserve Bank of India (RBI) on Wednesday, banks’ investments in CPs increased by R10,620 crore during the fortnight ended September 2 as compared to the previous fortnight to hit a record high of R1,07,304 crore.
Similarly, banks’ investments in CPs, at over R1.07 lakh crore at present, account for over a quarter of the total CP market. Two years back, banks’ investments accounted for barely 10% of the CP market.
Interestingly, while SBI now accounts for over 10% of the total CP market, its investments account for close to 40% of the entire banking system’s investments in CPs.
Banks’ increasing subscription to CPs is primarily a function of both low demand for credit from the industry and borrowers moving to the CP market for working capital loans to benefit from lower interest rates.
Growth in outstanding credit to the industry in July, for instance, was 0.55% (Y-o-Y). Five years back, in July 2011, it was 19.7% (Y-o-Y). “Given ample liquidity in the system and the fact that credit offtake is low, banks have only two options before them – 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 Bank of Baroda.
The rate of interest on a three-month CP for ‘AAA’-rated companies is now less than 7%, according to data sourced from Bloomberg. The lowest three-month marginal cost of funds based lending rates (MCLR), on the other hand, is 9%.
Bankers believe that until system-wide credit demand picks up, banks will have no other choice but to park their excess funds with instruments such as CPs. Karthik Srinivasan, senior VP, ICRA, thinks that banks are not too keen on reducing MCLRs because that would lower rates for all their customers and not just top-rated corporates.