Chunk of credit growth for banks is CPs

Banks’ investments in commercial papers (CPs) and certificates of deposit (CDs) have shot up even as credit growth has slowed since the Reserve Bank of India barred them from lending to corporates below the base rates and kept pushing key rates up.

As on December 31, the State Bank of India (SBI), India’s largest lender, had an exposure of Rs3,800 crore to CPs and Rs5,800 crore to CDs.

Similarly, mid-sized Union Bank of India had an exposure of around Rs2,000 crore to CPs as on December 31.

CPs are debt instruments with tenures less than one year issued by corporates to fund their working capital requirements such as inventories and payroll.

CDs, issued by banks, are debt instruments aimed at meeting short-term fund requirements.
According to Rajat Monga, chief financial officer, Yes Bank, this exposure also amounts to credit growth for banks.

“The end use of the money is the same. In true sense, that is also credit, though it may not show as loans or advances and it shows as investments,” he said.

It’s a view SBI chairman Pratip Chaudhuri appears to hold, too.

For SBI, the year-to-date credit growth stands in single-digit if the CP/CD exposure is not counted — for the April-December period, credit growth stood at 9%.

“But if you include this (CP/CD exposure), our credit growth till December stands at 11-12%,” said Chaudhuri.

According to Ajay Manglunia, senior vice-president, Edelweiss Securities, banks are looking at CPs as a means to deploy their short-term money. They usually buy papers of six months to one year tenure, he said.

According to Monga, customers have shown a preference for CPs in the last six months mainly because CPs are tradable instruments and their prices tend to be lower than lending rates.

CP issuances typically increase during the last quarter of the financial year — a trend that has been muted since the RBI hinted at a dovish stance on rates in its forthcoming monetary policy.

“Companies will, however, continue issuing papers further even in this market scenario, while investors will want to look at investing in medium-to-long term papers,” said Manglunia.