Working Capital Financing^361
Inter Corporate Deposits
One of the most utilised money market instruments, ICDs are the hallmark of lending
and borrowing between companies and high-networth individuals. Usually backed by a
security, (typical security being shares) ICD is normally for three months, but higher
and shorter periods are also prevalent depending upon the needs. Normally the maximum
time frame of an ICD is six months. But ICDs are rollable (turned over from one period
to another) and can extent to any period with the mutual consent of the lender and the
borrower.
It is one of the instruments which many cash rich corporates like to park their funds in
as the security is good and the interest rate is much higher than what they would get
from banks for the same time period. Risks of default are also much higher and it is
normally not possible to offload the securities in the market, as the market may not be
able to absorb the same.
Importance of personal contacts cannot be denied as this market operates from word
of mouth and no advertising is done because it could harm the reputation of the corporate
borrowing through ICDs. One of the top criteria for getting ICDs is the credibility of
the company in the market, the lessor the credibility the lower the chances of getting
the ICDs and the higher the interest rate the company may have to pay.
Short Term Loans from Financial Institutions
Although Bank Finance is one of the most important source of working capital funds,
money market is no less important. Money market is useful when the company does
not require a continuous source of working capital and is need of funds for only some
time. For this short term needs, which are over and above its normal needs of working
capital, going to banks is infeasible because either the limits with the banks have already
been exhausted or the process is so long that by the time the bank sanctions, the situation
for which the funds were required may already be gone.
Short term loans can be raised using highly liquid debt securities that have short terms
until they mature. They are known as money market instruments. All money market
instruments are debts that mature within 364 days or less.
Money market securities normally pay fixed rate of interest that is above the rate paid
by them for normal working capital financing. This is because the need is for shorter
duration and the risk of default is higher.
Money market instruments can pay interest, to their investors, as a discount from their
face (or maturity) values or on the maturity return both the principal and the interest
together.