Indian borrowers are grasping at shorter-term fixes for their finances as bank lending grows near the slowest pace in more than 20 years.
Companies being shunned by risk-averse banks are increasingly turning to the nation’s commercial paper market, where they can fund their activities with debt maturing between 30 days and one year. Issuance has boomed in the 12 months through May, jumping 64 percent to 3 trillion rupees ($47 billion).
Commercial paper is tempting firms with interest rates near a five-year low, as banks dawdle passing on Reserve Bank of India cuts in borrowing costs. The risk is that a sudden shortage of cash in the money markets could tip weaker borrowers into default. Stressed assets accounted for 11.1 percent of bank loans in the first quarter, the highest since 2002.
“The bulk of commercial papers are from good credits,” said Deep Mukherjee, a senior director at India Ratings & Research Pvt in Mumbai. “Some companies with tight liquidity conditions are going to the market though, and they may face challenges in refinancing the commercial paper if markets become risk averse.”
Demand for short-term debt is surging in India. The nation’s commercial paper market more than doubled between the end of 2013 and May 31 this year. In the same period, the total outstanding amount of local corporate bonds has risen 46 percent while bank credit increased just 14 percent.
Indian commercial paper dates back to 1989, when the central bank allowed companies outside of banking to issue short-term debt. The main buyers of the promissory notes are money market funds and banks themselves, who want to get better yields on their spare cash, according to Mukherjee.
The paper’s popularity is also spurring companies under financial pressure to seek short-term access to capital markets. In the past year, names such as Parrys Sugar Industries Ltd. and Godrej Properties Ltd. have considered commercial paper, data compiled by Bloomberg show. Parrys Sugar reported a loss for fiscal 2015 and Godrej’s short-term debt has more than doubled over the last two years.
Ganesh. S., a senior general manager of finance at parent EID Parry India Ltd., said the paper’s cost has “competitive pricing over bank loans.”
“We’ve been taking commercial paper in two-, three- and six-month tenors,” he said, adding the outstanding amount is about 8 billion rupees.
Godrej Properties continues to place commercial paper because it allows the company to get financing “at a very competitive rate,” Chief Financial Officer Rajendra Khetawat said in an e-mail.
For borrowers, there’s no shortage of liquidity. Since the end of 2013, when the RBI began to signal rate cuts, investment in India’s mutual funds has soared. Assets under management rose 40 percent in that period to a record 12.3 trillion rupees at the end of June, Bloomberg-compiled data show.
Just as mutual funds have cash to invest, Indian banks’ loan growth crawled at the slowest since 1994 in February amid an increase in souring loans. They’ve also been sluggish in passing on three cuts to the central bank’s benchmark rate. That’s fueled a burst of commercial paper issuance.
“It’s quite basic,” said Karthik Srinivasan, a senior vice-president at local rating company ICRA Ltd. “Borrowers are getting funds at cheaper rates, and a class of investors that’s willing to lend for less has grown.”
In the U.S., commercial paper has been an important funding source since the 19th century, with $953 billion of such notes outstanding at the end of March. But the market has halved since 2007, partly because of the role such instruments played in the global financial crisis.
Before the recession, commercial paper was perceived as safe “due to its short maturity and high credit rating,” according to a 2010 New York University report titled “When Safe Proved Risky.” After two hedge funds filed for bankruptcy in July 2007, the asset-backed commercial paper market was frozen and contagion spread to other short-term notes.
India wasn’t immune. In October 2008, the RBI established special liquidity measures to help mutual funds facing large redemptions meet their clients’ requests.
Since 2012, listed companies in India had the fastest increase in leverage among Asian borrowers through mid-2014, Goldman Sachs Group Inc. said in a February report. Those with the weakest interest-coverage took on 20 percent more debt over the period, the most at any point over the past decade, the investment bank said last month.
“It’s a good thing the commercial paper market has risen and companies are thinking of it as a funding avenue,” India Ratings & Research’s Mukherjee said. “The problem is at least some of these companies may be financing long-term assets with short-term funding.”