India Inc opts for non-bank funding

Major corporates are by-passing banks and going in for funding through commercial papers (CP) as the the latter offer cheaper rates than banks.

A CP is a short-term, unsecured money market instrument issued in the form of a promissory note. By the end of December 2015, the total outstanding towards commercial papers was Rs 3,80,280 crore and the year on year growth has been 96.6 per cent.

The companies with the highest credit rating A1+ account for 75 per cent of the total number the issu-ers of commercial papers in 2015-16, whilst 93 per cent of issuers have A+ ratings. Investors have higher confidence in these companies who have superior debt paying capacity. These figures on growth of commercial papers were compiled in a book CP-Broadening India’s debt markets for the first time in India by Care Ratings.

“The high growth in issuance of commercial papers during 2015-16 is on the account of declining growth of credit from banks and low interest rate charged by commercial papers when compared to bank loan rates.”

The average issuance rate has come down to single digit rate — 9.8 per cent in FY16 for the first time in five years.

Bank credit, for instance, fell from Rs 5,94,288 crore in FY2014-15 to Rs 4,93,336 crore in the first nine months ending Dece-mber 2015, whlist comme-rcial papers grew from Rs 86,660 crore to Rs 1,72,030 crore, or a 26 per cent inc-remental funds increase during the period “indicating a major substitution between the two,” said Care. Commercial papers are gaining in importance given the low transmission of policy rates in the lending space.

Small companies with good ratings and microfinance institutions in particular are progressively using this route to finance their requirements.