Commercial paper

Commercial paper

Subject: Economy

Context: Commercial paper issuance is picking up steam among Indian corporates and a growing number of domestic firms are turning towards these short-term debt instruments to meet their working capital needs even as riskaverse banks continue to sit on a huge liquidity.

Concept:

• According to RBI data, the monthly fresh issuance of commercial papers (CP) jumped over 37 per cent year on-year to ₹1.71-lakh crore in June 2021

Commercial Paper

• Commercial paper is an unsecured form of promissory note that pays a fixed rate of interest. It is typically issued by large banks or corporations to cover short-term receivables and meet short-term financial obligations, such as funding for a new project.
• As with any other type of bond or debt instrument, the issuing entity offers the paper assuming that it will be in a position to pay both interest and principal by maturity. It is seldom used as a funding vehicle for longer-term obligations because other alternatives are better suited for that purpose.
• The commercial paper provides a convenient financing method because it allows issuers to avoid the hurdles and expense of applying for and securing continuous business loans, and the Securities and Exchange Commission (SEC) does not require securities that trade in the money market to be registered.
• It is usually offered at a discount with maturities that can range from one to 270 days, although most issues mature in one to six months.