Base rate regime to propel commercial paper issuances: CRISIL- Profits of issuers to increase by 1 per cent

August 02, 2010: The base rate mechanism, which now replaces the benchmark prime-lending rate (BPLR) mechanism, is likely to make working capital borrowing from banks more expensive for corporates than accessing funds from the capital markets. As per a CRISIL study of the working capital requirements of India’s corporates, switching to commercial papers (CP) will assist corporates save interest costs, thereby resulting in a one percentage point increase in their profits.

The supply of CPs from corporates was low in the past; corporates had the flexibility to avail of funds from banks at rates that were on par with CP rates under the erstwhile BPLR regime. Now, with that flexibility no longer available under the base-rate mechanism, corporates are likely to issue a larger quantum of CPs. CRISIL’s analysis reveals that corporates with ratings of ‘P1’ or higher, have rupeedenominated working capital bank borrowings of around Rs.1800 billion as on March 31, 2010, all of which potentially can be replaced by CPs.



Short-term instruments rated ‘P1+’ and ‘P1’ by CRISIL, have displayed robust credit quality over the past decade; the one-year default rate for such ratings during the period 2000-2009 has been zero. Says Raman Uberoi, Senior Director, CRISIL Ratings, “CRISIL believes that the additional comfort of liquidity backup, combined with historically robust credit quality, makes CPs rated ‘P1+’ and ‘P1’ by CRISIL attractive investment options for MFs, even on a risk-adjusted basis. Under the base-rate regime, MFs can consider lending to corporates directly by subscribing to CPs. Banks, too, are likely to invest aggressively in CPs, to retain corporate customers, thereby adding to the overall demand for CPs.”

Corporates are likely to switch to CPs to fund short-term working capital requirements under the baserate mechanism. Adds Somasekhar Vemuri, Head, CRISIL Ratings, “By making this switch, CRISIL estimates that corporates can save as much as Rs.11.7 billion in interest expenses - equivalent to around 1 per cent of their net profits. These savings may be higher during periods of abundant liquidity”.



(This is press release of Crisil)

RELATED ARTICLES

Assocham urges RBI to further fine tune base rate system of banks.... Read More

Base rate introduction unlikely to pressurise bank profitability.... Read More

Base Rate system for Banks- Full Guidelines .... Read More

CLICK FOR Updated list of Base Rates of Banks in India

CLICK FOR MORE FEATURES & STORIES