19th meeting of FSDC held in New Delhi

The Nineteenth Meeting of the Financial Stability and Development Council (FSDC) under the Chairmanship of the Union Minister of Finance and Corporate Affairs, Shri Arun Jaitley reviewed the current global and domestic economic situation and financial sector performance. The Council discussed at length the issue of real interest rate, current liquidity situation, including segmental liquidity position in NBFCs and mutual fund space. The Council decided that the Regulators and the Government would keep a close watch on the developing situation and take all necessary measures.

The Financial Stability and Development Council (FSDC) was constituted in December, 2010. The FSDC was set up to strengthen and institutionalise the mechanism for maintaining financial stability, enhancing inter-regulatory coordination and promoting financial sector development.

The Council is chaired by the Union Finance Minister and its members are Governor, Reserve Bank of India; Finance Secretary and/or Secretary, Department of Economic Affairs; Secretary, Department of Financial Services; Chief Economic Adviser, Ministry of Finance; Chairman, Securities and Exchange Board of India; Chairman, Insurance Regulatory and Development Authority and Chairman, Pension Fund Regulatory and Development Authority. It also includes the chairman of the Insolvency and Bankruptcy Board (IBBI).

In May, the government through a gazette notification, had included ministry of electronics and information technology (MeitY) secretary in the FSDC in view of the increased focus of the government on digital economy.

The Council deals, inter-alia, with issues relating to financial stability, financial sector development, inter–regulatory coordination, financial literacy, financial inclusion and macro prudential supervision of the economy including the functioning of large financial conglomerates. No funds are separately allocated to the Council for undertaking its activities.

Why companies use commercial papers as a source of funds

Commercial papers have become one of the popular routes for corporates to raise funds when compared with loans from banks in recent times. Here is all you need to know about commercial papers.

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.

Because of surplus liquidity, short-term borrowing rates in money markets have significantly declined post demonetisation 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.

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. In case of sudden tightening of liquidity, a firm’s ability to secure funding can be challenged. Within the year, liquidity conditions can become tight in certain months such as the end of a quarter, because of advance payment of taxes and the like. At such times, funding costs can also rise for the issue of CPs.

Therefore, commercial papers should not be used as a permanent source of capital and should largely be used to benefit from liquidity conditions and arbitrage in short-term borrowing rates.

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