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Why is commercial paper said to be better than bank finance for working capital?

At the outset, I must make it clear that commercial paper (CP) can be issued only by companies having a strong track record of profitability and conforming to other prescribed financial parameters. Yes, such companies find CP better than bank finance because it enables them to set the pace and dictate terms. In a bank loan, the bank normally dictates terms.

But a company issuing CP, issues it keeping in mind the market rate of interest. The rate of implicit interest (CPs are issued at discount) is much lower than what the bank charges but sufficiently attractive for banks to invest their surplus funds. Often it is slightly higher than the interest on gilt securities banks otherwise park their monies in. Therefore it is mutually beneficial for both the eligible corporates and banks. With banks meeting CRR and SLR norms more than required, CPs become their preferred choice.

S. MURLIDHARAN

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