With an increasing dependence on the commercial paper market, the volume of CP issuance stands at an all-time high of Rs 5,29,000 crore in Q1 financial year 2017.
With an increasing dependence on the commercial paper market, the volume of CP issuance stands at an all-time high of Rs 5,29,000 crore in Q1 financial year 2017.
Given the shorter tenure of these instruments, the CP outstanding increased by 25 per cent YoY to Rs 3,38,000 crore as on June 2016. It accounts for around 4.5 per cent of the total domestic bank credit as on June 2016 as compared to around 3.5 per cent as on March 2016.
The CP outstanding, though on a smaller base, has increased at a CAGR of 35.5 per cent over the last three years compared to the 10.5 per cent for bank credit and 15.0 per cent for corporate bonds.
CP’s are popular with better-rated companies as they are able to raise money at 7 per cent which is one and a half to two and a half per cent lower than the bank lending rates.
These companies deepened their activities in the debt capital markets to raise short-term funds by replacing a portion of their bank funding through CPs and long-term bonds.
Sounding a note of caution on this development, Karthik Srinivasan, senior VP and co-head, financial sector ratings, ICRA, said: “The issuer and the investor segment need to be mindful of the potential rollover risks with the reduction in CP tenures in the industry, amidst growing volumes. The main investor class has shifted to the shorter maturity CPs, given the regulation for marked-to-market implications for all investments with residual tenures of more than 60 days.”
A report of month-end holdings by MFs, for instance, indicate that the proportion of investments in CPs, with residual maturity of less than 90 days, has increased over the last few quarters to 87 per cent as on June 2016 from 82 per cent and 79 per cent as on June 2015 and June 2014 respectively.
