Commercial paper route of funding dries up for India Inc

Last Updated: Wed, Nov 07, 2012 04:10 hrs

Raising funds through commercial paper (CP) has become difficult for the corporate sector following a series of defaults and rating downgrades, resulting in lack of investor confidence in these instruments.

CP is unsecured, short-term debt instruments issued by a company, typically for financing working capital requirements. Banks and mutual fund houses were the primary investors. While some mid-sized banks have stopped investing in CP, other are only doing so in the highest rated companies, mainly public sector enterprises.

Bankers say they are becoming extremely cautious on CP after the defaults in payment by companies such as Deccan Chronicle Holdings (DCHL), Gammon India and Hindustan Construction Company.

So, too, with fund houses. However, these also have a sectoral limit, which impacts the exposure to CP. “We are extra careful after instances of defaults,” said a fixed income fund manager.

DCHL is estimated to have raised close to Rs 300 crore earlier this year by way of CP, offering rates as high as 12-14 per cent for six months to a year. However, it defaulted in making payments.

Lending rates in the banking system continue to be high, due to which CP was a cheaper route for companies. However, the recent default instances have made it difficult for companies with a slightly lower credit rating to raise funds through this route. “Generally, companies do not default on CP. They somehow borrow and repay the loans. But the incident of DCHL has resulted in companies with lower credit rating finding it very difficult to refinance loans,” said a loan syndicator.

Reserve Bank of India data shows commercial bank dues in CP as on October 19 was Rs 37,130 crore, compared with Rs 22,447 crore a year before. However, with the number of downgrades rising in the past 18 months, this amount is expected to fall. “The defaults in CP are expected to rise on account of a slowing economy. In such a scenario, the outstandings in CP will also go down,” said a senior official of a public sector bank.

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