Commercial paper issuance is picking up steam among Indian corporates and a growing number of domestic firms are turning towards these short-term debt instruments to meet their working capital needs even as risk-averse banks continue to sit on a huge liquidity.

According to RBI data, the monthly fresh issuance of commercial papers (CP) jumped over 37 per cent year-on-year to ₹1.71-lakh crore in June 2021 against ₹1.25-lakh crore during the same month in the previous year. In fact, the monthly CP issuance of ₹2.24-lakh crore in March 2021 is the highest in the last 14 months.

Broadening market

In the first edition of its quarterly Commercial Paper (CP) Market Dossier, India Ratings and Research (Ind-Ra) said that the rising number of issuers in a month suggests broadening of the market and the CP issuance trend in the Q1FY22 suggests that the market has shown resilience amid the uncertain period of the second Covid wave.

The rating agency said the liquidity framework adopted by the Reserve Bank of India along other regulatory interventions have catalysed the market development. These have rationalised credit and term risk premium for high rated issuers and brought about a surge in demand for CPs.

Although CP issuance is picking up month-on-month, the overall commercial paper outstanding has gone down considerably. According to latest RBI data, CP outstanding as of May 2021 stood at ₹3.89-lakh crore as against an outstanding of ₹3.91-lakh crore at the end of first quarter of FY21. The outstanding was as high as ₹5.04-lakh crore in Q1FY20.

While a growing number of corporates are tapping the CP market, the drop in total outstanding can be attributed to a sharp decline in fresh CP issuance by NBFC and HFCs.

Increased resilience

“Corporates have shown increased resiliency in issuing CPs amid the second covid wave compared to the first wave. However, NBFCs and HFCs have remained cautious, as reflected in the sharp drop in their CP volumes during April-May 2021,” Ind-Ra said in its report.

“Overall, corporate issuances have exhibited a rising trend; On an average, 70 corporates and 50 NBFCs/HFCs tapped the CP market in 1QFY22 (4QFY21: 70 and 60, respectively). Interestingly, the corporate issuances are now around two-thirds in terms of volume, compared to one-third in the last decade,” it added.

Ind-Ra also said that the spread between bank’s marginal cost of funds-based lending rate and CP rates would remain wide, and this will likely attract more issuers to tap the CP market in the near term.

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