• PAGE ONE
• INDEX
• HOME

Confused CP norms

P. Devarajan

THERE seems to be a lack of relationship between the Draft Guidelines on Commercial Paper from the RBI and the Report of the Internal Group of the central bank.

While the Internal Group is in favour of making CP a standalone product, delinking it from the working capital limits set by banks, the Draft Guidelines prefer automatic clearance for CP to raise 50 per cent of the working capital (fund-based) limit.

The RBI group does not convince when it contends a standalone product ``may also result in over-dependence of corporates on short-term funds. To avoid such a situation, the need for placing a ceiling on CP was discussed... and there is a need to prescrib e a ceiling on the amount of CP which any company can raise.''

With more than 80 per cent of the funds in CPs coming from banks there cannot be over-dependence, as the lenders are supposed to know their corporates.

Currently, companies have to obtain a specific minimum credit rating from any of the Credit Rating Agencies (CRAs) specified by the RBI, to issue CPs. For this, the CRAs carry out detailed studies of the corporates and the ratings are valid for the quant um and period for which the resources are raised.

The report says, ``the larger the amount a company intends to raise through CP, lower would be the credit rating for the CP.'' One cannot grasp the statement; can a company which does not raise any funds via CP, be deemed to be the best?

The report says: ``The prescription of minimum rating by RBI would provide an automatic mechanism for placing a cap on the amount of CP which a corporate can raise. Thus, the limits for CP issuance would emerge from the minimum credit rating stipulated b y the RBI and the actual rating given by the CRA based on its assessment. The CRA has to take on the responsibility of monitoring that the limits of CP issuance are strictly adhered to by the corporate.''

From when did the CRAs get the powers to monitor corporates? And should CRAs perform the job? Is it not the duty of the Department of Supervision of RBI or the banks?

Further, the group is in favour of stand-by facility from banks. Currently, the working capital (fund-based) limit of the company issuing a CP is correspondingly reduced by the bank after the issue. On payment of the CP, banks are permitted to restore th e working capital limit. ``Thus, the present mode of CP issuance extends an implicit line of credit to the issuers of CP for retiring CP at the time of maturity,'' the report says.

The group adds: ``... banks' decision whether to offer or not to offer a stand-by line of credit should entirely depend upon their own commercial judgement and should be with the prior approval of the board. This may also form part of the single/group bo rrower limits fixed by the RBI.''

The stand is reasonable but no mention is made of it in the draft guidelines.

In 1997-98, the fortnightly issue of CP ranged between Rs. 83 crores and Rs. 1,880 crores. The amount outstanding at the end of March 1998 was Rs. 1,500 crores, at end-March

1999 Rs. 4,770 crores and at end-January 2000 it was Rs. 7,814 crores.

For CP to flourish, the internal group's ideas look a better bet.