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Concept of
commercial paper
18
March 2013
Market Survey
Table I
Jan. 1990
July 1990
Tangible net
worth
Rs 100 million
Rs 50 million
July 1991
WCFBL#
Minimum size
June 1994
July 1995
Sep. 1996
Feb. 1997
Oct. 2000
Oct. 2004
Rs 40 million
Rs 40 million
Rs 500,000
Rs 10 million
Rs 5 million
Rs 2.5 million
Maximum
size
20% of
30% of
75% of
Cash Credit
Component
Denomin
ations
Rs 2.5 million
Rs 1 million
Rs 500,000
500,000
Maturity
period
91 days to
6 months
3 months to
1 year
15 days to
1 year
7 days to
1 year
P1+ by CRISIL
Credit rating
MPBF*
MPBF
#WCFBL = Working Capital Fund Based Limit; *Maximum Permissible Bank Finance
Source: Collated from circulars issued by the RBI
Development of
commercial paper market
In the early years of nineteenth
century, the commercial paper was
introduced in the USA as a measure of short-term financing. Following the founding of General Motors
Acceptance Corporation (GMAC)
in the year 1919, the commercial
paper market expanded. It is only
after 1980 that the issuance of commercial paper became popular in
European and Asian countries. It
Present position of
commercial paper market
Following the various relaxation
in terms and conditions for the issuance of commercial paper, the
market has witnessed a consistent
growth. Soon after its introduction
in the Indian market, the demand
for commercial paper increased significantly from Rs 5770 million in
March 1993 to Rs 32,640 million in
March 1994. But in the year 1995
and 1996, the outstanding amount
in commercial paper declined sharply due to withdrawal of the stand-by
facility of the paper coupled with
rising interest rates and shrinking
of surplus funds with banks. However, the market experienced slugMarch 2013
19
Market Survey
Table II
Table IV
Commercial Paper:
Outstanding Amount,
Range of Discount
As at endMarch
Total
outstanding
(Rs billion)
Range of
discount
(per cent)
1993
5.77
1994
32.64
1995
(Rs billion)
End of
period
Manufacturing
Share
Amount
(per cent)
Financial institution
Total
outstanding
Share
(per cent)
Share
(per cent)
Amount
42.50
Mar-09
271.83
62
127.38
29
441.71
15.7616.00
Jun-09
11.0112.00
Sep-09
344.37
50
234.54
34
108.30
16
687.21
316.48
40
315.09
40
160.71
20
792.28
6.04
14.0015.00
Dec-09
360.27
40
424.43
47
118.35
13
903.05
1996
0.76
20.1520.15
Mar-10
394.77
52
223.44
30
136.85
18
755.06
1997
6.46
11.2512.25
Jun-10
425.72
43
433.30
43
138.90
14
997.92
1998
15.00
14.2215.50
Aug-10
571.61
45
559.33
44
134.55
11
1265.49
1999
47.70
10.0511.50
Sep-10
580.98
52
404.85
36
134.20
12
1120.03
2000
56.63
10.0012.00
Oct-10
803.06
54
548.94
37
144.20
1496.20
2001
58.46
8.7511.25
Nov-10
588.71
50
454.57
39
134.65
11
1177.93
2002
72.24
7.4110.25
Dec-10
492.82
60
249.60
30
83.00
10
825.42
2003
57.49
6.007.75
Jan-11
555.91
55
356.01
35
105.60
10
1017.52
2004
91.31
4.706.50
Feb-11
513.39
51
402.62
39
96.90
10
1012.91
463.50
58
226.95
28
112.60
14
803.05
2005
142.35
5.207.25
Mar-11
2006
127.18
6.699.25
2007
178.38
10.2513.00
2008
325.92
9.5014.25
2009
441.71
6.412.5
2010
760.56
5.309.00
2011
803.05
7.9315.00
2012
911.90
9.7515.25
Table III
Amount
(Rs billion)
Growth Rate
(per cent)
Mar-12
911.9
Jun-12
1258.1
37.96
Jul-12
1732.3
37.69
Aug-12
1878.9
8.46
Sep-12
1705.8
0.09
20
March 2013
steadily as both borrowers and investors shifted into commercial paper from alternative money market
instruments.
According to the recent data released by RBI, the corporate sector
has increased its average fortnightly issuance of commercial papers
(CPs) by around 22 per cent (q-oq) to 330 billion during Q2 at discount rates in the range of 9-15 per
cent. This rising trend continued
up to the month of August. However raising funds through commercial paper is becoming difficult
for the corporate sector following a
series of defaultsand rating downgrades, resulting in lack of investor
confidence in these instruments.
Commercial banks and the mutual
funds are parking most of their
surplus amount in commercial
papers as they are yielding better
returns than any other short-term
money market instruments. Hence
banks and mutual fund houses
Market Survey
are the primary investors. With
the number of downgrades rising
in the recent months, the volume
of commercial paper issuance has
decreased. From Table III, it is
evident that the growth rate in average daily volume of commercial
paper issuance is showing a declining trend.
Issuers profile in commercial
paper market has changed remarkably in the recent period. Major
issuers in the commercial paper
market are shown in the Table IV.
During the period 2009-11, leasing and finance companies continued to remain the major issuers
of commercial papers followed by
manufacturing and financial institutions. In the quarter ended
on 31st March 2011, the share of
leasing and finance companies was
58 per cent of the total amount of
commercial paper outstanding,
whereas the share of manufacturing companies, which stood as high
21