Fundraising via commercial paper (CPs) stood at an all-time high level of Rs 4.92 lakh crore as on June 30, 2018, up 49% y-o-y and 32% q-o-q. While in the same period, the volume of fresh bond issuances declined by 34% y-o-y to Rs 1.16 lakh crore.
The trend of higher short-term borrowing has continued in Q2FY19, with further increase in volume of CP outstanding to a new high of Rs 6.39 lakh crore (Y-o-Y growth of 96%) as on July 31, 2018 indicating continued risk aversion of investors towards long-term debt instruments given their expectations of hardening in bond yields in coming months.
Analysts at Icra said: “Rising bond yields and the consequent possibility of mark-to-market (MTM) losses led to investors turning risk averse and shunning long-term debt instruments, contributing to a surge in issuance of short-term debt instruments. CPs have now become a meaningful source of funds, though we expect it may stabilize as corporate bond issuances to improve with stabilization in long-term yields in coming quarters”.
Although the CP outstanding volume as on July 31, 2018 was partially driven by IPO of HDFC Asset Management Company, whereby NBFCs are estimated to have raised `50,000-70,000 crore through 7 days CP route to fund their clients towards subscription of IPO, even excluding this one-off spike, the CP volume are estimated at `5.69-5.89 lakh crore (Y-o-Y growth of 75-81%) as on July 31, 2018.
“With surge in CP volume, the ratio of CP outstanding to long-term corporate bond outstanding has increased to 20% as on July 31, 2018 as compared to 13% as on June 30, 2017 and last three-year average of 15%. Excess reliance on short-term debt poses rollover risks and hence liquidity risks for the borrowers. Though already at high of 20%, we may see some rise before it stabilises, as bond volumes could picks up,” said analysts at Icra.
The widening of the spread is driven by limited increase in call money rates (these continue to be lower than policy rate, i.e. Repo rate of 6.5%) as the weak public sector banks (PSBs) have been refraining from growing the advances and have been deploying their deposit surpluses under reverse repo or call money markets. Based on Icra’s estimates, during last 12 months ending June 30, 2018, the advances of 11 PSBs under prompt corrective action (PCA) framework of RBI declined by `1.57 lakh crore, but the decline in deposits was lower at `0.89 lakh crore, thereby reflecting a buildup of surplus liquidity with these PSBs under PCA.