Regulation of Bank Finance^391
longer be necessary for banks to restore the cash credit limit to meet the liability on
maturity of CPs. This will impart a measure of independence to CP as a money market
instrument. The intrinsic strength of the issuing company will be reflected from the
ratings of its CP.
Although CP has been delinked from working capital limits, the ceiling of 75 per cent of
maximum permissible bank finance continues. Thus, with the revised guidelines an
issuing company will have to approach the bank every time to have a higher cash credit
limit, once it issues CP and its cash credit limit is brought down to that extent. Now, CP
will not be a self-liquidating arrangement. Earlier, there was a virtual guarantee by the
bankers to adjust the CP on maturity which definitely was an added advantage.
Future of Commercial Paper in India
Commercial paper as vibrant instrument of financing working capital needs has a very
bright future in changing economic scenario in view of growing liberalisation and decontrol
and widening openings for the private sector even in strategic sectors of the economy.
Corporate enterprises requiring burgeoning funds to meet their expanding needs will
find it easier and cheaper to raise funds from the market by issuing commercial paper.
Furthermore, use of this instrument provides greater degree of flexibility in business
finance to the issuing company in as much as it can decide the quantum of CP and its
maturity on the basis of its future cash flows.
Fears are expressed in some quarters that popularity of CP will adversely affect the
banksí business. However, the situation will not be as alarming as is made out. It must
be noted that the use of CP is restricted only to highly creditworthy and large profitable
organisations. Medium and small enterprises will, therefore, have no alternative but to
resort to banks for their working capital needs. Demand for bank loans will certainly
surge in future owing to massive expansion that it likely to take place in small sector in
view of the current industrial policy of the Government. In the events of any loss of
income the same may be effected by fees earned by the banks in their capacity as
issuing and paying agents of the papers.
However, the popularity of CP as the most lucrative means of short-term finance will
pass through the acid test in view of delinking of CPs from cash credit facilities. With
the delinking, CP will not be a self-liquidating arrange≠ment. In the changed situation,
corporates will prefer the cash system of CP as against issuance of CPs which will
result in better utilisation of cash credit limits. There can be two probable ways to
increase the credit off take. One way of giving impetus to cash credit could be by
offering a finer rate to the borrowers who on an average avail themselves of 70 per
cent or above of cash credit limits.