The rates for commercial papers continue to be lower than the bank lending rates despite banks dropping their lending rates under the under the marginal cost-based lending rate (MCLR) regime.
As a result, India Inc has continued to raise funds from the less expensive debt market, dashing all hopes of banks for a revival in corporate lending.
Commercial papers are short-term unsecured promissory notes issued by companies.
Steel Authority of India (SAIL) is planning to raise Rs 1,500 crore from the debt market through a private placement. HDFC Ltd raised Rs 700 crore from the debt market last week at 8.06% for a 3-month commercial paper.
Besides banks, mutual funds are the major investors into the CPs.
The outstanding commercial paper borrowing as a percentage of short-term bank credit has gone up to 14% in 2015-16, higher than the 11 % raised in the previous financial year. A small percentage of this was expected to flow back to the banks.
Keki Mistry, vice chairman and chief executive officer, HDFC Ltd, told dna, "Bank lending rates have not fallen significantly for the commercial market demand to shift to the bank's books."
Banks continue to invest in the commercial papers of the companies at lower rates, resulting in bank credit to grow at a slower pace. A senior official in charge of treasury from a public sector bank said, "Companies are still exploring the debt market for fine rates and banks are forced to invest into the commercial papers of the companies as they are negotiating with a number of banks. As competition sets in, some of the banks agree to private placement, leading to working capital needs being sourced from the debt market. We however are not investing into the CPs of companies as it will reduce the credit growth."
MCLR, the new lending regime, was set up for faster transmission of monetary policy rates and to ensure uniformity and transparency in calculation methodology for lending rates. It brought down bank lending rates specially at the shorter end by 0.50 % to 1%. One month loan from SBI is at 9.05%, 3-month at 9.10%, and 6-month bank loan at 9.15% with other big banks such as HDFC Bank, ICICI Bank offering similar rates.
Rating company Ind-Ra said in a report that it expects banks margins in 2016-17 to face downward pressure on the back of this transition; the impact however will be different across banks, based on the variances in their asset liability management (ALM) gaps, floating rate book, current account savings account (CASA) ratios, share of borrowing in the funding profile and differences in their operating cost structure." However, banks with a stable current account and savings account(CASA) are expected to see a lower impact.
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