THE RISE & FALL OF

COMMERCIAL PAPER
Presented by: Ahinave Vaibhav 08
Bhanushali Meet 18
Gupta Saurabh 25
Nikhil Marathe 35
Mellissa Nazareth 37
Shreyas Shendurnikar 52
Sourish Adhikary 57
COMMERCIAL PAPER
• Unsecured, negotiable, transferable money
market instrument
• Suggested in 1987, introduced to Indian
money market in 1990.
• Fulfills short term requirements
• Can be bought by individuals, banks,
corporates, registered and unincorpoted
entities
• FII investment, Crisil P2 or equivalent
ratings, maturity period
• Offered at a discount, further rate is decided
by the market forces
 ADVANTAGES OF
COMMERCIAL PAPER

For Issuers For investors

• Less interest cost
• Increased access to short term
• Higher yields
funding
• Flexibility & Liquidity • Portfolio diversification
• Investor recognition • Flexibility
• Ease and low cost of • Liquidity
establishments
• No collateral
ROLE OF CRAS IN COMMERCIAL
PAPER MARKET
• All eligible participants should obtain the credit rating for
issuance of Commercial Paper, from either the (CRISIL) or
(ICRA) or (CARE) or (DCR India) or such other credit rating
agency as may be specified by the Reserve Bank of India from
time to time, for the purpose.

• CRA carries out an in-depth analysis of business activities and

financial parameters of the company. 

• CRAs should monitor the CP limits of corporates and any

instance of non-adherence of CP limit by corporates has to be
reported by them to the RBI immediately.
 RATINGS FOR COMMERCIAL
PAPERS
• RBI in 2017 relaxed commercial paper
(CP) issuances by lowering the minimum
required credit rating to A3 from A2 as per
rating symbol and definition prescribed by
SEBI.

• Entities having CP issuance of more than

1000 Crores have to obtain credit rating
from at least two CRAs registered with
SEBI and consider the lower rating.

• Ideally, The issuer of the CPs should have

at the minimum a P-2 (CRISIL25)
equivalent to the [ICRA]A2 rating.
 REGULATIONS
• Guidelines Pertaining to Eligibility of Issuer.
a) Companies, including Non-Banking Finance Companies (NBFCs) and
All India Financial Institutions (AIFIs).
b) Other entities like co-operative societies/unions, government entities, trusts,
& LLP with net worth of 100 Crore.
• Guidelines Pertaining to Eligibility of Investors.
a) All residents, and non-residents permitted to invest in CP including Foreign
Investors
• Guidelines For Forms.
a) Form Should be issued in the dematerialized form through any depositories.
b) Issued Amount Should be in Multiples of 5 Lakhs.
c) Should be issued at discount.
 RATING REQUIREMENTS
Should be Approved by At least 2 CRA.

• Documentation Procedures

• Issuing &Paying
ISSUER Agent (IPA) INVESTORS
• Secondary Market Trading & Settlement of CP.
a) Trades in CP shall be reported within 15 minutes of the trade to
the Financial Market Trade Reporting and Confirmation Platform
b) Settlement cycle for trades in CP shall be T+0 or T+1
c) Options (call/put) are not permitted on a CP.
 HISTORY – RISE OF
COMMERCIAL PAPERS

• Introduced in 1990
• Issued in the form of promissory note by one Institution to another for a
duration of 15-364 days
• Banks used to lend at low interest rate and has no set regulations -
competitive rates in traditional form of lending
• Consequence – RBI introduces Base Rate Policy
• As the rate of interest on CP was lower than Banks, corporates started
shifting towards CPs
• Main Players – Non Banking Financial companies (NBFCs) since
certain regulations imposed on Banking institutions were not applicable
on NBFCs
 HISTORY – RISE OF
• COMMERCIAL PAPERS
Banks could Invest in CPs instead of Lending directly as it also
helps them maintain LCR -a prudential requirement prescribed by
the Reserve Bank of India.
• Primary Advantage being they are unsecured promissory notes
IL&FS CRISIS
The NBFC business model has flaws :-
1) It raises short term funds and lends it for longer
term loans.
Eg :- It raises money through commercial paper
and lends it for a car or housing loan which is for
5 to 10 years.
2) The NBFC’s have to renew commercial paper
or take loans for paying older debt
3) In good times this works smoothly but in
tough times the cycle is broken
 IL&FS CRISIS

• After demonetization,
liquidity in creased in market
.
• NBFC’s started lending more
.
• Were unable to repay.
• This led to the NBFC crisis.
 WHAT HAPPENED IN IL& FS?
• The group consists of total 169 subsidiaries.
• Many of the subsidiaries were unable to payback the short-term
debt and hence the major lenders like SBI and LIC did not get
the money back , which was mostly borrowed through
commercial paper.
• Hence , their ratings dropped down
• Mutual funds and other investors were afraid to invest .
• Cost of funds was increased by 150 basis points
( It was increased from 5 % to 6.5%)
DHFL ISSUE

Dewan Housing Finance (DHFL) defaulted on

unsecured commercial paper of ₹225 crore.

Without any recourse to fresh debt funding, a situation

exacerbated by multiple rating downgrades, the
company met all its financial obligations through a
combination of internal accruals, sell down of its loan
assets and monetization of non-core assets.

Due to the downgrade by rating agencies expecting a

default for the commercial papers (CP) much before
they had fallen due, DSP mutual fund had already
taken a 100 per cent markdown on their CP
investments.
FALL IN COMMERCIAL PAPER
• NBFC’s correcting asset liability
MARKET
mismatch
• Investors cautious in investing in CP
which has increased cost of funds
• NBFCs now largely dependent on banks
compared to CPs to MFs and Insurance
companies
• Increase in NCDs due to inability to
rollover debt by issuing CPs
• NBFCs opted to securitize assets over
issuing CPs
• CP issuances fell to an 8 year low and
amount issued fell to 5 year low
• MFs rollback 25% money from CPs in a
year
 COMMERCIAL PAPERS POST
• PANDEMIC
Decline of Mutual Fund holdings • CP Issuances: Category Wise

in NBFC CPs • The amount of CP issuances by NBFCs fell

during April-June 2020 compared to previous
year. However, in response to the measures
taken by the RBI and the Government the
share of NBFCs in CP issuances increased
 COMMERCIAL PAPERS POST
• The CP market registered strongPANDEMIC
annual growth
starting from 2007-08.
• The CP market showed an uptrend till 2018 and Commercial Paper
went downhill thereafter. 600000
400000
• The market is again picking up due to 200000
interventions by RBI and government 0
1 1 0 9 8 8 7 6 6 5 4 3 3 2 1
02 02 02 01 01 01 01 01 01 01 01 01 01 01 01
tc 2 an 2 ay 2 g 2 ec 2 ar 2 ul 2 ct 2 eb 2 ay 2 ep 2 ec 2 pr 2 ul 2 v 2
O J M A u D M 5 J O F M S D A 1 J No
15 31 15 31 15 31 1 31 15 31 15 31 15 3 15

Total Amount Outstanding

Reported During the Fortnight
 FALL IN INTEREST RATES DUE
TO RBI INTERVENTIONS

• WAY declined from 5.39% in • Rates of private NBFCs spread

April 2020 to 3.99% in over 91 days T-Bills
July’2020
• With the reduction in RBI’s
policy rate, and liquidity
Range of Rate
support of Interest
by RBI, (WAY)
all the for
money
Commercial Paper
market rates declined sharply.
12

2
11 12 12 13 14 15 15 16 17 18 18 19 20 21
20 r 20 c 20 20 20 r 20 c 20 20 20 r 20 c 20 20 20 r 20
n p n p n p n
J u M a D e Se J u M a D e Se J u M a D e Se J u M a
15 15 15 15 15 15 15 15 15 15 15 15 15 15
THANK YOU!