Easy liquidity in the financial system is encouraging corporates to raise cheap short-term resources via commercial papers (CPs), leaving working capital limits with banks unutilised.

CP issuances surged over 190 per cent year-on-year to ₹2.66-lakh crore in July The issuance in June was at ₹1.71-lakh crore and in the first quarter totalled ₹3.89 lakh crore. Cumulatively, CP issuances for April-July 2021 increased 41.3 per cent to ₹6.55-lakh crore from ₹4.64-lakh crore during April-July 2020.

According to industry experts, India Inc may start drawing the unutilised working capital from banks once the Reserve Bank of India begins unwinding its ultra-loose monetary policy and interest rates move up in the term money market.

Currently, the sanctioned working capital limits are not getting converted into disbursements as corporates are able to raise short-term funds via CPs at cheaper rates ( as low as 3.40 per cent) as the financial system is flush with funds.

Banks awash with liquidity

Banks, too, are going with the flow, investing in CPs, whose maturity ranges from a minimum of seven days and a maximum of up to one year, issued by corporates.

That banks are awash in liquidity is underscored by the fact that they parked ₹6,31,751 crore with the RBI on August 17 at its overnight reverse repo window (earning 3.35 per cent) and ₹2,50,029 crore at its 14-day variable rate reverse repo/VRRR window (interest rate: 3.43 per cent).

Rajkiran Rai G, MD & CEO, Union Bank of India, feels that once the economy gathers steam and liquidity in the system drains out, interest rates on unsecured money market instruments such as CPs will go up.

This will help banks as corporates will then utilise working capital.

On banks parking surplus funds with the RBI at 3.35-3.40 per cent, he said: “If somebody (a corporate) is offering us 4.50 per cent (on a CP), why not invest? From the third quarter, we see working capital utilisation going up.”

Sanjiv Chadha, MD & CEO, Bank of Baroda, said: “As we enter the second half of the year, we should see some kind of pricing power returning to banks in the corporate segment…We are preparing for that.”

Referring to the calibrated increase in the quantum of liquidity absorption via VRRR auction, announced by RBI on August 6, Crisil, in a report, said RBI is taking baby steps in the direction of exit from an extremely easy monetary policy over the past one year, by a calibrated withdrawal of liquidity from the banking system.

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