India Inc gets cheaper loans from cash-surplus MFs

India Inc has found a new, cheaper way of meeting its funding requirements — borrowing from mutual funds through short-term commercial paper, at rates lower than what any bank can offer.

Flush with cash, mutual funds (MFs) have been deploying their surplus funds in CP issued by top-rated corporates, at rates ranging from 3-5.5%. As a result, top corporates like IOC, HPCL, Tata Motors and L&T Finance have become very active in the CP market. In fact, CP issuances have risen to an all-time high this year.

According to the latest data released by the Reserve Bank of India, outstanding CP issuances by corporates zoomed to a high of Rs 88,161 crore as on September 15, 2009, as compared to Rs 54,181 crore in September last year. This phenomenon has clearly elbowed out banks in terms of their coprorate lending. Most banks confirm that their corporate lending portfolios are yet to see a pick-up.

According to Yogesh Agarwal, CMD, IDBI Bank, “We have made a lot of sanctions for corporate loans, but the withdrawals on these accounts aren’t happening.” Adds MD Mallya, CMD, Bank of Baroda, “Corporate lending is still yet to pick up.” Bank credit growth has slumped to 9.7%, according to the latest figures released by the RBI – almost half of their year-end estimate of 18%.

For corporates, it’s a win-win situation. Not only are they getting short-term cash at rates much lower than what banks can offer them, they also have the option of rolling over these CPs. Corporate paper is usually issued with a tenure of three months. Mutual funds, on the other hand, are enjoying higher rates from corporates, as opposed to what they would have otherwise got by deploying cash in treasury bills or lending it in the CBLO market.

According to J Moses Harding, head of global markets at IndusInd Bank, a number of mutual funds have been actively deploying funds in CPs issued by major corporates. “MFs usually have an appetite of less than 90 days for deploying funds, so a three-month paper suits them fine,” he explains. In fact, AMFI data shows that liquid and money market mutual funds saw inflows of Rs 1,01,441 crore in October. Rajat Monga, CFO, Yes Bank, says, “It’s the higher-rated corporates that are issuing such paper, and the demand for it is apparent when you see the way CP issuances have risen this year.”

http://economictimes.indiatimes.com/Markets/Analysis/Companies-turn-to-MFs-for-raising-cheap-funds/articleshow/5289829.cms