Tag: commercial paper

CP market: Improving risk appetite needs close monitoring, says Ind-Ra

Banking & Finance

[ad_1]

Read More/Less


Sustained easy money alongside improving risk appetite, as signified by the trend of overall rising number of issuances in the primary Commercial Paper (CP) market, coupled with healthy volumes in the second quarter (2Q) of FY22, requires close monitoring, according to India Ratings (Ind-Ra).

The credit rating agency has noticed certain instances of risks building up in relation to high-rated corporates raising short-term debt to take arbitrage opportunities because of low rates in the CP market.

For India Inc, low-cost CP is preferred route

The risk appetite in the system has improved, particularly in 2QFY22, driven by the strong corporate performance, buoyant external conditions and sustained ultra-loose monetary policy conditions, said Nikhil Changulani, Analyst, Ind-Ra, in a report.

The agency observed that a few large corporates, who have access to CPs at the cheapest cost (sub 4 per cent), are using arbitrage opportunities by increasing the use of CPs and enhanced drawings from some banks, thus opening up risks in the system.

Ind-Ra believes the risks to be presently limited to a few cases; but if not addressed could accentuate and spread to the wider baskets.

CP: market resilient in 2QFY22

Changulani noted that the CP market trend suggests that the market has shown resilience during 2QFY22 amid the uncertain period of the second wave of Covid-19.

“The overall rising number of issuances in the primary CP market coupled with healthy volumes has been the trend. Moreover, the rising number of issuers in a month suggests broadening of the market although there is a concentration risk pertaining to the tenor of borrowings.

Commercial paper issuances by corporates gather steam despite second Covid wave

“The risk appetite in the system has improved, particularly in 2QFY22, driven by the strong corporate performance, buoyant external conditions and sustained ultra-loose monetary policy conditions,” the analyst said.

In September 2021, the number of unique issuers in the corporate and finance segments increased to 74 (69 in August 2021) and 65 (60), respectively. The corporate issuers mopped up ₹73,900 crore (₹60,100 crore) while the finance issuers raised ₹42,900 crore (₹1,07,700 crore).

While the money market rates have remained historically low as a result of favourable environment and assurance from the RBI regarding loose policy stance, Changulani underscored the modest hardening in rates that was visible in October 2021.

Ind-Ra believes a sustained rise in commodity prices worldwide and looming supply-side shortage in various spectrums could pose challenge to the short-term rates.

The report said corporates are emerging from the second wave of Covid-19 and are tapping the CP market positively in anticipation of higher working capital requirement, owing to the high commodity prices coupled with a recovery in capacity utilisation.

IPO financing

The agency underscored that the concentration of issuances in the seven-day bucket is largely due to the initial public offer (IPO) financing in the equity market. On the other hand, three-to-four-month bucket mirrors the nature and origination of fund flows to mutual funds.

Non-banking financial companies (NBFCs) have been gaining the advantage of the excess liquidity and a favourable environment for tapping CP markets to raise short-term debt for financing IPOs, Ind-Ra said.

The months of June, July and August 2021 witnessed heavy activities in the IPO market and many NBFCs were active in funding IPOs.

NBFCs raised ₹59,200 crore in June 2021, ₹1,41,200 crore in July 2021, and ₹1,07,700 crore in August 2021 via CPs.

The agency believes the RBI’s capping of individual borrower’s limit for NBFCs to ₹1 crore for IPO financing would affect the oversubscription of IPOs and reduce CP issuances.

Ind-Ra opined that the spread between banks’ marginal cost of funds-based lending rate and CP rate could remain wide. However, the shorter end of the market rate could start inching up in 3QFY22 based on the expectation (of unwinding ultra-loose monetary policy) from the RBI.

Nevertheless, the wide gap between CP rates and marginal cost of funds-based lending rate will remain a driving factor for more traction by the issuers to tap the CP market in the near to medium term, the agency said.

[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , , , , , ,

Surplus liquidity, firm demand of MF drive down yields on CPs

Banking & Finance

[ad_1]

Read More/Less


Demand from fund houses also increased because the investment made by them in CPs have matured in the past few days.

By Manish M. Suvarna

The yields on commercial papers (CP) maturing in three months have eased nearly 10 basis points in the last few weeks owing to huge surplus liquidity in the banking system and improved demand from mutual funds. Similarly, yields on the 91-day T-bill also moderated 10 basis points in August.

As of September 7, yields on CPs issued by non-banking finance companies (NBFC) maturing in three months were hovering between 3.50% and 3.65%, and those on papers issued by manufacturing companies were trading between 3.35% and 3.50%. This is lower than 3.65-70% and 3.40-55% yields traded on papers issued by NBFC and manufacturing companies, respectively, in mid-August. The 91-day T-bill cut-off was at 3.3892% on August 11 and 3.2856% on September 1.

“RBI’s bond and foreign exchange purchases continue to add to the unprecedented level of liquidity surplus, which has increased from about Rs 7 trillion at start of the fiscal to over Rs 11 trillion now. This is exerting downward pressure on the money market and short-end bond yields,” said Pankaj Pathak, fund manager for fixed income at Quantum Asset Management.

The liquidity in the banking system has remained in surplus in the past few weeks despite the central bank conducting variable rate reverse repo (VRRR) auctions. This is because the inflows from G-SAP auctions, government spending, redemption, coupons and CIC paybacks have offset the outflows from GST and VRRR auctions.

Currently, the liquidity in the banking system is estimated to be in a surplus of around Rs 8.79 lakh crore.
In August, the Reserve Bank of India (RBI) injected liquidity worth Rs 50,000 crore through the purchase of government securities under the Government Securities Acquisition Programme, however, Rs 5.50 lakh crore has been withdrawn via VRRR.

Market participants expect that the liquidity in the system is expected to remain range-bound this week due to almost the same amount of inflows and outflows. Kotak Mahindra Bank report showed that the inflows of `99,840 crore is expected this week and Rs 1.06 lakh crore outflows can be seen.

Additionally, the demand from fund houses has improved substantially since June due to inflows into shorter end funds such as duration fund, ultra-short-term fund, liquid fund, etc. Mutual funds are larger buyers of short-term debt papers such as commercial papers and certificates of deposit.

Demand from fund houses also increased because the investment made by them in CPs have matured in the past few days.

Dealers with brokerage firm said that if such high liquidity persists in the system then yields on CPs are expected to moderate further. “It would be extremely difficult for the RBI to suck out this excess liquidity on a durable basis without hurting the bond market sentiment. T-Bill and money market rates may remain suppressed in the near term,” Pathak said.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.



[ad_2]

CLICK HERE TO APPLY

Leave a comment , , ,

Dull Demand: Drop in commercial papers issuances points to slowing credit growth at banks

Personal Finance

[ad_1]

Read More/Less


The trend may well continue through the current quarter.

A year-on-year (y-o-y) drop in issuances of commercial papers in April 2021 may be hinting at a slowdown in credit growth at banks and non-banking financial companies (NBFCs). As financiers count the human toll the pandemic is taking on their companies, they have begun to restrict some areas of operations that require high contact such as disbursements and collections. The phenomenon is in turn playing out in the CP market as companies do not need as much funds as they would under normal circumstances.

According to data released by the Reserve Bank of India (RBI), CP issuances were to the tune of Rs 89,576 crore in April 2021, lower than Rs 1.33 lakh crore in April 2020. Interestingly, April 2020 was a month of nationwide lockdown, in contrast to the smaller lockdowns currently in effect across states.

Analysts are of the view that financial sector entities — both banks and non-banks — have turned cautious about the well-being of their employees now that a highly virulent strain of the Covid-19 virus is infecting people. So while it may still be early to determine the impact of the second wave on credit offtake, lending has taken a backseat, for sure. “Banks are concerned about their branch officials and NBFCs are also being careful about the safety of employees. So, disbursements are not where they would have normally been and the NBFCs’ fund-raising requirement is also lower,” an analyst tracking the financial sector said.

The trend may well continue through the current quarter. On May 3, Kotak Mahindra Bank MD & CEO Uday Kotak said the bank was ensuring that all its people work from home for the next one week, including those in the sales and collections verticals. This arrangement is to be monitored on a week-by-week basis.

The current wave of the pandemic has spread deep into India’s rural areas and financiers operating there are feeling the pain. Umesh Revankar, vice-chairman and MD, Shriram Transport Finance Company, told analysts on April 30 that the spread of Covid-19 in the hinterland has impacted the company’s staff and their relatives, resulting in lower productivity in the month of April and possibly in May as well.

The increasing digitisation of disbursements at NBFCs has taken some of the edge off the pain but other risks remain. On Monday, the Reserve Bank of India (RBI) warned that the impact of the second wave could manifest chiefly in the form of destruction of demand. Analysts have earlier flagged this risk in the financial system.

In a recent note, Emkay Global Financial Services had said it expects about 50-70% demand destruction for self-employed focused products and 25% for products geared to the salaried class during the lockdown. “Combined, banking credit could moderate by about 159 basis points (bps) to 9.3% in FY22. NBFC credit will similarly slow by 140 bps to 12.8%,” Emkay had said.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.



[ad_2]

CLICK HERE TO APPLY

Leave a comment , , , ,