Commercial papers set to become hot cakes: ACI

The commercial paper (CP) market is likely to expand about 29 times to Tk 10,000 crore in the next five years for the low cost and easy access, according to a study by ACI, one of the leading conglomerates of the country.   

CP is a short-term unsecured debt instrument issued by corporates to meet their interim financing needs. The debt is issued at a discount from the prevailing market interest rates.

“Given the 5-7 percent interest rate spread in Bangladesh, we see huge prospects for CP,” said Abu Hasan Zaman, corporate treasury manager of ACI, who supervised the study.

With CP, companies can now get funds at 10-10.5 percent interest against the normal lending rate of 12-15 percent, he said.

Since its introduction in the country in October 2013, at least four companies have raised Tk 345 crore through six CPs, with half of the funds collected in just the last four months.

ACI issued the country's first-ever CP, where Eastern Bank worked as the lead arranger and agent.

The company has so far raised Tk 200 crore by issuing three CPs, both secured and unsecured, said its corporate treasury official.

“Our inaugural CP was backed by bank guarantee, so it basically became an investment against a credit exposure of a bank,” said Zaman.

Then early this month, the conglomerate launched its first unsecured CP. IDLC Finance worked as an agent for the issuance.

An unsecured CP is one which does not have any bank guarantee; it is issued directly by the corporate.

Many companies are interested in CP as it is a low-cost alternative to bank loans, Ali Reza Iftekhar, managing director of Eastern Bank, said recently.

Maturities on CPs range from 45 to 360 days.

Since it is not backed by collateral, only firms with excellent credit ratings will easily find buyers without having to offer a substantial discount (higher cost) for the debt issue.

“This can be a strategic segmentation for Bangladesh if large corporate become less dependent on vanilla bank credit and divert their borrowing to CPs and other money market products,” said Zaman.

In doing so, the SME and agricultural sectors will get more access to banks credit, that too at rates as cheap as the ones large corporates are enjoying nowadays, he added.

The study also urged the Bangladesh Bank to come up with a comprehensive guideline for CPs to avoid malpractices.

“We should be very calculative before issuing and investing in CPs. One or two bad experience may erode investors' confidence, which will limit the market growth.” 

The expected guideline from BB may need to consider a number of issues such as credit rating, eligibility of issuer and subscriber, size of the issue against balance sheet, denomination, tenure, redemption process, auditor, company status (listed/non-listed), clean CIB, bank overdue record for last few years and tradability in secondary market, he said.

BB will provide all sort of support to promote CP as it wants to expand money market products in the country, said Biru Paksha Paul, chief economist of BB, adding that he will raise the issue in the next senior management team meeting with the governor.

The Reserve Bank of India introduced CP in 1990 in a bid to enable the high-rated corporate borrowers to diversify their sources of short-term borrowings and provide an additional instrument to investors. RBI also issued a guideline in this regard.

In India, the average outstanding CP in a year is around Rs 250,000-375,000 crore, which has been growing at 20-30 percent in the last 20 years, according to the study. 

suman.saha@thedailystar.net