As of September 19, banks had invested R2,887 crore into CPs, a massive 240% rise from a year ago. While this is still just a drop compared with banks' credit offtake, the slowdown in loan disbursement and the resulting liquidity is pushing banks to scout for yields.
Bankers said that while it is beneficial for them to extend loans to a company instead of investing in a security issued by it, many times they buy CPs on relationship basis. You cannot force a client to borrow, especially if the customer is getting a cheaper source of funding through CPs, said P Mukherjee, general manager credit to large corporates, Axis Bank.
A bank has to maintain only a standard provisioning of 0.4% once it extends a loan as against provisioning for mark-to-market of a CP investment. Further, the interest income earned by a bank on a loan is higher than that of a CP.
For a company, the interest cost is lower in case of a CP currently than a bank working capital loan (banks are not allowed to lend below base rate). A top-rated company can raise one-year money through CPs at 9.25-9.30% but may have to pay the base rate of 10-10.25% in the case of loans.
If you are a regular issuer in a CP market and have a good rating, it makes sense for the company to borrow here than take a working capital loan that could have a minimum interest rate of 10.50%, said a senior trader at a brokerage firm.
Mukherjee added, that companies that have better ratings and stronger balance sheets can opt to raise funds through CPs.Small companies cannot raise funds and they have to avail bank loans even if it works out to be expensive, he said.
For instance, while a top-rated corporate can borrow 1-year money at 9.25% through CPs, a lower-rated company may have to pay 10% or more. Further, the CP market being opaque and less liquid, small companies may find it cumbersome to search for investors. Mutual funds are, by far, the largest investors in CPs followed by banks and some companies that have established treasury desks.
"Banks do not prefer to buy CPs but they may to earn returns in the short term," said Ashutosh Khajuria, head of treasury, Federal Bank.