Base rate system may sweep priority sector crowd towards commercial papers
By Neelima Shankar
Mar 17, 2010
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The base rate system has been the talk of town since quite some time. Many issues have arisen against the new directive which is going to hit the banking platform from July this year following which no banks can lend below their base rate. This will give a leap to the commercial papers market as the priority sector market is expected to prefer them instead of bank loans for meeting their short term requirements, banking and company officials said.

There have been questions whether base rate should be implied to priority sector or not. RR Nair, director and chief executive of LIC Housing Finance had said, "If the lending rates according to the base rate system apply to priority sector as well, credit off take might suffer in the next fiscal too." The base rate would lead to higher cost of borrowing of these firms.

Commercial papers are unsecured money market forms issued in the form of promissory notes. Promissory notes are negotiable instruments.

The cost of commercial papers would be cheaper as compared to the cost of borrowing as per the base rate system of lending. Moreover, with base rate coming into play, negotiation of any kind will not be possible between banks and corporates.

Currently, the system of lending is as per BPLR. The priority sector used to receive loans below BPLR. The rate of interest for a three-month loan can go as low as 5-6% for well-rated companies.

"Volumes of commercial papers will increase because it will be cheaper for companies to raise money through this route rather than loans from banks," said Paritosh Kashyap, executive vice-president at Kotak Mahindra Bank Ltd.

Commercial papers are issued on short term basis with tenor ranging from 15 to 365 days. The interest rate on these papers is related to the yield of one year Government bond.

Alpana Dave, assistant vice-president at Edelweiss Securities Ltd, said there is enough demand from investors for commercial papers. She said that according to her projections, NBFCs would be raising more money using commercial papers.

"NBFCs backed by big groups such as Tatas, Bajaj and ICICI are likely to issue more paper than companies because they need money for their lending business," she said.

V. Ravi, chief financial officer at vehicle finance company Mahindra and Mahindra Financial Services Ltd said that his firm would opt in for commercial papers after base rate system comes into play.

"If we treat commercial papers as working capital loans, we will be able to invest more in these papers," Debjiban Basu, general manager, treasury, United Bank of India said.

Although the cost of commercial papers will depend on the rating of a company, but in overall terms they will be cheaper than bank loans.


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