35% YoY rise in CP investment by banks in May

Bank loans to corporates may have slowed down, but that doesn’t signal a fall in demand for working capital, as companies are increasingly raising funds through commercial papers.

Banks’ investments in commercial papers (CPs) stood at Rs 1.19 lakh crore as of May 2017, up 35 per cent from a year earlier, according to the latest Reserve Bank of India data.

This at a time when pure loans have barely managed to grow 5 per cent and loans to corporate are decelerating. “Investments in CPs is growing faster than pure bank loans is largely a reflection of borrowers’ preference,” said Siddhartha Sanyal, chief India economist at Barclays. “It is cheaper than loans in the MCLR (marginal cost of funds based lending rate) system of loan pricing,” he said.

However, CPs are not comparable with bank loans, and capital investment remains a drag on overall demand from banks.

“Commercial papers are relatively shorter term instruments, typically issued to meet working capital instruments and banks are more comfortable in parking their funds in these instruments,” Sanyal said.

For the country’s largest lender, State Bank of India, investments in CPs rose even in absolute terms than loans in June.The top lender’s loans rose 1.16 per cent or Rs 18,435 crore year on year in June 2017, while its investments in CPs rose 87 per cent or Rs 27,485 crore in the same period.

Outstanding issues of CPs amounted to Rs 3.9 lakh crore as of end May with mutual funds and NBFCs as other major investors. Even as capacity expansion is slowing credit demand from banks, many large corporate are deleveraging and preferring to use their own resources to fund business.

SK Ghosh, group chief economic advisor at SBI, said some top corporates reported contraction in loans in FY17.About 1,000 non-financial entities reported an aggregate decline of Rs 1,00,000 crore.”The debt contraction could either be through repayment, equity conversion or restructuring of debt,” Ghosh said.