Commercial Papers

Commercial Papers

Commercial papers have become one of the popular routes for corporates to raise funds when compared with loans banks in recent times.

What is commercial paper?

⏩A commercial Paper (CP) is an unsecured loan raised by firms in money markets through  instruments issued in the form of a promissory note. CPs can be issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of issue.

Why are CPs popular?

⏩Because of surplus liquidity, short-term borrowing rates in money markets have significantly declined post demonstration and are much lower than the lowest benchmark lending rates of the banks.

What are the advantages of issuing CPs?

⏩Apart from being a cheaper source of funds, it helps meet funding requirements relatively quickly for better-rated corporates.

⏩Procedural requirements for securing bank facilities and charge creation on assets is not required.

What are the key challenges with CPS?

⏩As the CP is an unsecured loan, the investor in commercial papers largely prefers highly-rated corporates or public sector entities in terms of credit rating. Lender appetite is limited to better rated companies.

⏩Also commercial paper markets can be seasonal and vulnerable to liquidity conditions.