CPs slide below bank interest

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New Delhi: The Indian money market is throwing up surprising developments that fly in the face of economic logic. The corporate sector, faced with the extreme reluctance of banks to lend, is raising money directly at rates lower than bank interest. This means a top-notch company can generate resources for a project through debt on the basis of its own balance sheet from the public instead of having to depend on bank loans.

Sample the latest weekly data put out by RBI. For the week ended November 30, it shows that commercial paper—short-term corporate borrowings with a maturity of less than one year—has been raised at rates in the 9.0-15.5% band. The lower end is less than the best rates offered by Indian banks to industry, which is close to 10% (the prime lending rate is 12.75-13.5%). Naturally, long-term debt paper floated by corporate India is available at even lower rates.

This sort of ‘lazy banking’ has dangerous implication for the financial sector. The chart shows that for the fortnight beginning November 15, interest rates on commercial paper for the best companies dipped even further away from the average PLR of the banking sector, accentuating the anomaly. “People are saying that the interest rate channel is not working that rapidly,” Arvind Virmani, chief economic advisor to the finance ministry, admitted on Tuesday.

This unusual situation can be attributed to banks’ reluctance to lend to companies, post September. Matters have been made worse as RBI too has been unable to goad them into lowering rates sufficiently. At present, the reverse repo rate is 5%, just below the rates available for government paper. This implies that banks can safely park their deposits with RBI or buy treasury paper to safeguard income.

In one fortnight in November, banks parked Rs 2.8 lakh crore in reverse repo. This is more than 10% of the total non-food credit made available by the banking sector to industry in 2008. In addition, the stock of money held as government paper has also ballooned by 400% between October and November to Rs 93,000 crore. As the inflation rate declines, the attraction of this avenue will increase further.