Bankers see risk in chase for commercial papers, BFSI News, ET BFSI
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The surplus liquidity in the money market has resulted in the heightened issuance of commercial papers. The average monthly outstanding during the first half of the current financial year has been over Rs 4 lakh crore. However, according to bankers, concerns are emerging on the nature of issuers with some borrowing at high rates.
Commercial papers, although debt instruments like bonds, are for very short tenures (usually three months), because of which issuers can get better ratings than they would for longer-term bonds. These are issued by corporates as well as finance companies and, in recent times, mutual funds have turned out to be major investors in this segment.The share of non-banking financial companies (NBFCs) in total commercial paper issuances increased to 43.2% in H1 of 2021-22 from 21.9% in the corresponding period of the previous year, while that of corporates moderated to 46.2% from 64.9% over the same period. Top-rated borrowers can raise funds at close to the reverse repo rate of 3.35%, which is the rate at which banks lend to the RBI. However, yield-chasing fund managers make small investments in high-yield papers and there have been outlier issuers at 12-13% as well.
According to bankers, there is a likelihood that the availability of cheap funds might prompt some intermediaries to arbitrate with more risky investments such as stressed assets. Although companies dealing in stressed assets do not borrow directly from money markets, they can raise money through intermediaries who have access.
Last month, SBI chairman Dinesh Khara said that the drop in credit deposit ratio has resulted in the mispricing of credit risk by banks. “There is a temptation on the part of lenders to go down the risk curve and misprice the risk. We are starting to see this,” he said. While bank deposits rose 3.2% to Rs 156 lakh crore in FY22 up to September 24, advances grew only 0.1% to Rs 109.5 lakh crore in the same period.
The RBI’s monetary policy report noted that commercial paper issuances increased to Rs 10.1 lakh crore during H1 2021-22 from Rs 7.9 lakh crore in H1FY21. Their rates were on an average 46 basis points (100bps = 1 percentage point) higher than the repo rate. However, the yields have risen due to increased issuances by NBFCs, partly to mobilise resources for investment in IPOs, but moderated subsequently, the report said.
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