In September, CP issuances dropped to Rs 54,535 crore, from Rs 1.23 lakh crore in August and Rs 1.3 lakh crore in July.
The recent overhaul in investment norms for debt mutual funds has led to a significant drop in commercial paper (CP) issuances that more than halved in September.
CPs are short-term debt instruments, mostly issued by non-banking finance companies (NBFCs), to raise funds for up to one year and by corporates to meet working capital needs. Mutual Funds are the biggest investors in these papers.
In September, CP issuances dropped to Rs 54,535 crore, from Rs 1.23 lakh crore in August and Rs 1.3 lakh crore in July. The cumulative issuances for the first half of the current financial year stood at Rs 6.7 lakh crore, 12.4 percent lower than the corresponding period year ago.
This is despite a fall in the cost of borrowing via CP for the fourth consecutive month. The weighted average yield of fresh issuances of CPs in September was at 5.7 percent, 39 basis points lower than the month ago and 202 basis points lower in the same month last year, according to CARE Ratings.
On September 23, the Securities and Exchange Board of India (SEBI) modified norms barring mutual funds from investing in unlisted securities. As most CPs are unlisted, this has impacted the demand for the papers in the short-term debt market.
"The rates are lucrative but corporates are being very selective in issuing CPs. They cannot rely on these instruments as a funding source," said Ajay Manglunia, Managing Director & Head Institutional Fixed Income, JM Financial. He said funding from banks has become stable and the availability of credit has improved from last year.
As a result, NBFCs and corporates are gradually moving on to bank loans to raise funds.
"Competition from alternate markets like CPs or debentures has weakened substantially, which has led to an increase in bank funding for NBFCs," said MB Mahesh, analyst, Kotak Institutional Securities in a report.
"Most NBFCs witnessed a 50-100 bps rise in the incremental cost of market borrowings led by rising rates of CPs and non-convertible debentures, and have reverted to bank borrowings to fuel growth," it added.According to norms, existing investments by debt funds in such papers have been allowed to be held till maturity but these are unlikely to be rolled over or renewed, which is usually the case with CPs. Going forward, issuers are likely to refrain from the CP market, given the stricter regulations.Not sure which mutual funds to buy? Download moneycontrol transact app to get personalised investment recommendations.