8/2/2019 CP, CB,CD(2)

1/24

Presented by:

Atul Hansda (15)

Max Manish Kujur (18)

Soumyajit Das (37)

8/2/2019 CP, CB,CD(2)

2/24

ExpenditureReceiptLiquidity

8/2/2019 CP, CB,CD(2)

3/24

8/2/2019 CP, CB,CD(2)

4/24

negotiable instruments drawn by the seller on the buyer which are, in turn, accepted anddiscountedby commercial banks.

short-term, self-liquidatinginstrumentwith low risk.

It enhances the liability to make paymenton afixed date when goods are bought on credit.

Bills of exchange are negotiable instruments drawn by the seller (drawer) on the buyer (drawee)for the value of the goods delivered to him. Such bills are called trade bills.

When trade bills are acceptedby commercial banks, they are called commercial bills.

The bank discounts this bill by keeping a certain margin credits. Banks, when in need of money,can also get such bills rediscountedby financial institutions such as LIC, UTI, GIC, ICICI, and IRBI.

The maturity periodof the bills varies from 30 days, 60 days, 90 days, depending on the creditextended in the industry.

The interest rate or floor rate is based on two things, (a)the Bank Bill Swap Rate (BBSW) and (b)amargin added by the lender of1.00-3.00% called thefacility fee

8/2/2019 CP, CB,CD(2)

5/24

Demand Bill / Usance Bill

Clean Bill / Documentary Bill

Inland Bill/ Foreign Bill - Export Bill/Import Bill

HundiDerivative usance promissory notes

8/2/2019 CP, CB,CD(2)

6/24

Demand Bill/ Usance Bill:

A demand bill is payable on demand, i.e.,immediately at sight or on presentation to thedrawee. A usance bill is payable after a specifiedperiod of time.

Clean Bill/ Documentary Bill:

In a Clean Bill documents are enclosed anddelivered against acceptance by the drawee after

which it becomes clear. & in case of DocumentaryBill documents are delivered against paymentaccepted by the drawee and documents of the fileis held by the banker till the bill is paid.

8/2/2019 CP, CB,CD(2)

7/24

Import / Export Bills:Export bills are drawn by exporters in any country outside India andImport bills are drawn on importers in India by exporters abroad.

Hundi:It is a of Bill of Exchange for financing the movement of agricultural

produce. It has a long history of use in India by bankers for raising

money or remitting funds or to finance inland trade.

Derivative usance promissory notes:These are notes introduced by the RBI with a view to eliminatingmovements of papers and facilitating multiple rediscounting. These arebacked by eligible commercial bills for the required amounts and a

usance period (up to 90 days.) The Govt. has exempted stamp duty onDUPNs. (the min period of rediscounting is 15days)

8/2/2019 CP, CB,CD(2)

8/24

It can be traded by offering the bills for rediscounting.In case of need for funds banks can rediscount the bills inthe money market and get ready money.

It is fully secured for investment since it is transferable byendorsement and delivery and it has a high degree ofliquidity.The bill market is highly developed in industrialcountries but it is very limited in India.CB rediscounted by commercial banks with Fiscalamount to less than 1000 cr.In India the bill market is not developed due to (i) thecash-credit system of credit delivery (where the onus ofcash management rests .

8/2/2019 CP, CB,CD(2)

9/24

8/2/2019 CP, CB,CD(2)

10/24

Introduced by RBI

CDs can be subscribed by an individual, as well as, by an institution

It is a usance promissory notes issued at a discount and are negotiable incharacter.

There is a lock-in-period of 15 days after which they can be sold.

The minimum size of the deposit is Rs. 5 lakhs and thereafter in multiples ofRs. 5 lakhs.

The rate of interest is determined by the parties to the transaction freely.

The instrument is to be stamped according to the rates prescribed by theIndian Stamp Act. Premature closure ofCDs is not permitted and buy-back ofthe CDs is prohibited.

No advance can be taken against the security ofCDs.

There is no limit for investment in CDs by the Banks.

8/2/2019 CP, CB,CD(2)

11/24

Eligibility :-CDs can be issued by (a)Scheduled commercial banks excluding Regional Rural Banks(RRBs) and Local Area Banks (LABs) and (b)select all-India financial institutions that have beenpermitted by the RBI.

Aggregate Amount :-Banks have the freedom to issue CDs depending on their requirements.

Minimum size of Issue and Denominations :-Minimum amount of a CD should be Rs.5lakhs, and in the multiples of it thereafter.

Who can subscribe :-CDs can be issued to entities like individuals, corporations, companies,trusts, funds and associations. NRIs may also subscribe to CDs but only on a non-repatriable basis.

Maturity :- For banks should be not less than 7 days and not more than 1 year. FIs can issue CDsfor a period not less than 1 year and not exceeding 3 years from the date of issue.

Discount/Coupon Rate :-CDs may be issued at a discount on face value.

8/2/2019 CP, CB,CD(2)

12/24

Reserve Requirements :-Banks have to maintain the appropriatereserve requirements, i.e, (CRR) and (SLR), on the issue price of the CDs.

Transferability :-Physical CDs are freely transferable by endorsementand delivery

Loans/Buy-backs:- Banks/FIs cannot grant loans against CDs.Furthermore, they cannot buy-back their own CDs before maturity.

Format of CDs :-Banks/FIs should issue CDs only in the dematerialisedform.

Security Aspect:- Since physical CDs are freely transferable byendorsement and delivery, it will be necessary for banks to see that thecertificates are printed on good quality security paper and necessaryprecautions are taken to guard against tempering with the document. Theyshould be signed by two or more authorized signatories.

8/2/2019 CP, CB,CD(2)

13/24

8/2/2019 CP, CB,CD(2)

14/24

A commercial paper is an unsecured short term promissory

note issued at a discount by credit worthy corporate,primary dealers and all India financial institutions. (Wasintroduced in India in Jan 1990)

A money market instrument, used to raise shortterm funds.Introduced in India in 1989 by the RBI on therecommendation ofVaghulworking group.

8/2/2019 CP, CB,CD(2)

15/24

It is negotiable and transferable by endorsement and delivery with a fixedmaturity period. Onlythose companies which have

(a)Net worth of10 crore,

(b)MPBFof not less than 25 crore,

(c)Listed in stock exchange can issue cps

Generally issued at a discount by leading creditworthy and highly ratedcorporate to meet their working capital requirements.

Companies can issue CPs either directly to the investors or throughbanks/merchant banks (called dealers).

CPs have to be compulsorily rated by a recognized credit rating agency,companies can issue CPs only if they have a short term rating of P2 byCRISIL (or at least P1/A1).

8/2/2019 CP, CB,CD(2)

16/24

Maturity :

Previously: 91to 180 days. Now: 7 days to 1 year.

A companyissues CPs to save on interest costs i.e. it issues CPs only when the situation issuch that CP rates are lower than the rate at which it borrows money from its banking

association.

No prior approval of the RBI is required to issue a CP and underwriting the issue is alsonot mandatory.

A CP can be issued to individuals, banks, companies and other registered Indian

corporate & unincorporated bodies. NRIs can be issued a CP only on a non-transferableBanks are not allowed to underwrite or co-accept the issues of a CPs

FIIs are eligible to invest in CPs but within limits prescribed by SEBI

8/2/2019 CP, CB,CD(2)

17/24

BOD

VERIFICATION( Credit rating+ NW >10 cr + report to RBI)

ISSUER COMPANY

CREDIT RATINGAUTHORIZATION

IPA

CP issue at a discount rate

Investor/Bank/company

8/2/2019 CP, CB,CD(2)

18/24

Eligibility :- Corporates, primary dealers and all-India Financial Institutions are eligible to issue a cp.

Rating requirement :-The minimum credit rating shall be P2 of CRISIL or such equivalent rating by

other approved agencies.

Maturity :- At present, the maturity period has been brought down to a minimum of 7 days and a

maximum of up to 1 year from the date of issue.

Denomination :-Minimum of Rs.25 lakhs and multiples thereof.

Limits and Amount :-A cp can be issued as a stand-alone product. Banks and financial Institutions

will have the flexibility to fix working capital limits duly taking into account the resource pattern of

companies financing including cps.Issuing and Paying Agent(IPA) :-Only a scheduled commercial bank

Investment in a cp :-A cp may be held by individuals, banks, corporate, unincorporated bodies,

NRIs, and FIIs.

8/2/2019 CP, CB,CD(2)

19/24

Higher growth from 1997-98 onward. On October 15 1997, total outstanding amount on

Commercial paper transaction in Indian money market was Rs. 3377 crore.

outstanding amount increased substantially to Rs. 1,28,347 crore on July 15,11

Reason:-attributed to the rapid expansion of corporate manufacturing and financialcompanies in liberalized and Globalized Indian economy during the last decade of 20th

century and the first decade of 21st century.

The growth of Commercial Paper market in India was more conspicuous after the

financial year 2007-08.

On 15 July, 2007, total outstanding amount on Commercial paper transaction was Rs.

28,129 crore.

This amount increased to Rs. 48,342 crore on 15 July, 2008.

Since then, there was substantial increase in the outstanding amount on Commercial

paper transactions to the highest level of Rs. 1,28,347 until 15 July, 2011.

8/2/2019 CP, CB,CD(2)

20/24

This period was largely dominated by the Late-2008 financial crisis. In this

period, RBI reduced Repo rate drastically from 9% to 4%.

However, Prime rate of commercial banks in India remained rigid at 12%.

The discounting rate on Commercial papers was in the range of 6.5% to 10%

in October 2010.

It is explicit from these statistics that the cost of borrowing working capital

through Commercial paper transaction became relatively lower for thecorporate companies in India in comparison to the cost of borrowing the same

working capital through cash credit facility from the commercial banks. The

obvious result was an absolute growth of the Commercial paper market in

India, particularly, after 2007-08 onward

http://en.wikipedia.org/wiki/Late-2000s_financial_crisishttp://en.wikipedia.org/wiki/Repo_ratehttp://en.wikipedia.org/wiki/Prime_ratehttp://en.wikipedia.org/wiki/Prime_ratehttp://en.wikipedia.org/wiki/Prime_ratehttp://en.wikipedia.org/wiki/Prime_ratehttp://en.wikipedia.org/wiki/Repo_ratehttp://en.wikipedia.org/wiki/Repo_ratehttp://en.wikipedia.org/wiki/Repo_ratehttp://en.wikipedia.org/wiki/Late-2000s_financial_crisishttp://en.wikipedia.org/wiki/Late-2000s_financial_crisishttp://en.wikipedia.org/wiki/Late-2000s_financial_crisishttp://en.wikipedia.org/wiki/Late-2000s_financial_crisishttp://en.wikipedia.org/wiki/Late-2000s_financial_crisishttp://en.wikipedia.org/wiki/Late-2000s_financial_crisishttp://en.wikipedia.org/wiki/Late-2000s_financial_crisis

8/2/2019 CP, CB,CD(2)

21/24

Quick and cost effective way of raising working capital.

High credit ratings fetch a lower cost of capital.

Wide range of maturity provide more flexibility.

Does not create any lien on asset of the company.

Tradability of commercial paper provides investors with exit options.

Best way to the company to take the advantage of short term interest

fluctuations in the market.

They are cheaper than a bank loan.

8/2/2019 CP, CB,CD(2)

22/24

Its usage is limited to only blue chip companies.

Issuances of commercial paper bring down the bank credit

limits.

A high degree of control is exercised on issue of commercial

paper.

Stand-by credit may become necessary.

8/2/2019 CP, CB,CD(2)

23/24

8/2/2019 CP, CB,CD(2)

24/24