The Hindu Business Line : Commercial paper issuances by corporates rise 80%

The demand for commercial papers (CPs) is on the rise with mutual funds investing more in such short-term instruments. The total amount of outstanding CPs issued by companies rose by about 80 per cent to Rs 42,183 crore on October 31, 2007, against Rs 23,521 crore during the same time last year.

“There is a latent demand from mutual funds for commercial papers and certificate of deposits as these are typically short-term instruments and they fit the overall maturity profile. The demand for CPs, however, falter when the mutual funds are hard pressed for cash particularly during the time of advanced tax outflows or tight liquidity conditions in the market,” said Mr Arvind Chari, Fund Manager, Fixed Income, Quantum AMC.

CP is a short-term money market instrument issued by companies at a discount on the face value. Generally, banks, individuals or money market mutual funds buy CPs, but of late, mutual funds particularly have shown keen interest in these short-term instruments. Three-month, six-month or one year CPs fits the overall maturity profile for mutual funds.

The amount outstanding in commercial papers has been particularly high from July 2007 onwards. The amount jumped from Rs 28,129 crore in July to Rs 31,784 crore in August, then rose to Rs 33,227 crore in September and surged to Rs 42,183 crore in October, according to the Weekly Statistical Supplement issued by the RBI.

“In July and August, when the call rates dipped below one per cent levels rendering the deployment of funds in CBLO market unattractive, CPs became a more attractive option,” said Mr Sanjay Sinha, Head - Equity, SBI Mutual Fund.

Mr Sinha said that CP issuances depend to a huge extent on the ability of mutual funds to raise assets from investors.

Linked to credit growth

According to Mr Ritesh Jain, Head, Fixed Income, Kotak Mahindra AMC, the rise in CP issuances is linked to credit growth. “Retail credit has seen some slackening this year compared to last year. MFs have had to compete with banks in lending to corporates and the way to do it is through CPs,” he said.

According to investors, most issuances have been from non-banking finance companies. “I haven’t come across any major CP issuances by the manufacturing companies, so a large chunk of the increase would be accounted by NBFCs. Although, recently there has been an increase in the issuances by the real estate companies,” said Mr Chari.

Outlook

Talking about the future outlook on the CP market, Mr K. Harihar, Executive Vice-President, Head-Treasury and Financial Institutions, Development Credit Bank, said, “The tight liquidity and the high call rates are a deterrent to the issuance of commercial papers at present, however, once this eases and there are good FII and FDI flows into the country, the liquidity will improve and subscription to CPs will be enhanced.”

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