August 24, 2003	Sunday	Jumadi-us-Sani 25

KARACHI, Aug 23: Banks and DFIs can deal in commercial papers but they will not provide any guarantee or undertaking. Nor will they give an impression to the public that they stand behind these papers. The reason is simple. The commercial papers will be unsecured instruments in nature.

The State Bank on Saturday issued guidelines for the banks and DFIs or development finance institutions desiring to deal in commercial papers. Commercial papers or CPs will be unsecured promissory notes to be issued by corporates — other than a bank or DFI. The maturity period of these papers will be not less than 30 days and not more than nine months. Banks will be allowed to act as an issuing and paying agent (IPA) of the commercial paper on behalf of the issuer.

Senior bankers say the purpose of allowing banks and DFIs to deal in commercial papers is to enable them to use excess funds profitably — and to let the corporates have another tool for raising short term debt. Bankers say a huge fall in the yield on treasury bills — more than 4.6 per cent within last fiscal year — has made it necessary for banks and DFIs to have alternate investment tools. Similarly, it seems natural for corporates to go for non-conventional ways of raising debt from the secondary market if their borrowing demand is rising and they either do not want to borrow directly from banks — or the banks cannot meet their credit demand for one reason or the other. Commercial paper should also open up for the general investor a high-yielding but more risky avenue of investment. And that would fit in perfectly well in the present scenario when the weighted average rate of bank deposits has fallen a full percentage point below inflation — and return on national saving schemes has also been on the decline.

Bankers also say since the government borrowing requirement is not too big — and the SBP is also fast exhausting its own stock of TBs — the need to introduce new instruments of investment for banks/DFIs can hardly be over-emphasized.

They say whereas the issuance of commercial papers would help corporates mop up excess liquidity in the secondary market, investment in them by banks/DFIs would mean indirect financing of the private sector credit requirements.

Bankers say the SBP has asked the Pakistan Banks Association to prepare standardized documents, including a model format of commercial paper, in the light of the guidelines spelt out in its circular BPD 28. But the central bank has allowed the banks and DFIs that they may continue to use their own documents vetted by their legal counsels for issuing or investing in a commercial paper till such time the standardized documents become available.

Banks and DFIs can issue a CP and become its paying agent provided that they meet the minimum capital requirement of the SBP and have a minimum credit rating of A minus for medium- to long-term and A2 for short-term. And they are supposed to open a separate account for receiving and disbursing funds on account of their commercial paper.

They are also supposed to make it clear to the investors in the offering documents that their investment is subject to credit risk — and that payment would be made to them only if the issuer has made the funds available to IPA or issuing and paying agent.

More importantly they must inform the investors “that in case of default the IPA will not be in a position to seek recovery from the issuer or initiate any action against them either on its own or on behalf of the investors.” That is exactly what makes the commercial papers unsecured instruments and the SBP rightly expects banks/DFIs to make it clear to prospective investors.

The SBP guidelines say that in case of default by the issuer “it will be the responsibility of the bank/DFI acting as IPA to notify promptly such default to the investors.” Payment of only partial amount shall also be considered default. “In case of partial payment by the issuer bank/DFI acting as IPA shall distribute the received funds as per terms of the underlying agreements.”

The guidelines say there will be a custodian to the issue of commercial paper and at the discretion of the issuer and the IPA “investors may be required to invariably inform the custodian about the sale/purchase to make a transfer effective.”

The guidelines say that banks/DFIs shall invest in only those commercial papers:

(a) which have been issued in pursuance of the SECP’s guidelines for the issue of commercial paper and meet all the requirements laid down by the State Bank itself.

(b) where the equity of the issuer is not less than Rs100 million.

(c) where the current and debt-equity ratios of the issuer do not fall below 1:1 and 60:40, respectively. For this purpose the numbers of the last audited accounts of the issuer will be applicable.

(d) where the issuer does not have any overdue or default as evidenced by a report received from the Credit Information Bureau of SBP. The CIB report obtained by the bank/DFI for this purpose should not be more than two months old.

(e) where the current credit rating of the issuer should not be below single A for long-term and single A-2 for short-term.

(f) where the issuing and paying agent is either a commercial bank or DFI or an investment bank with a minimum rating of A minus for long-term and single A-2 for short-term.

(g) where the total borrowings of the issuer by way of CPs do not exceed its equity i.e. paid-up capital and reserves.

Banks/DFIs investing in CPs should also ensure that their total exposure, including investment in commercial papers, at all time remains within the per party exposure limit. The investment by a bank or DFI in commercial papers of an issuer shall also not exceed 10 per cent of the equity of the bank/DFI itself. And a bank/DFI’s investment in a single issue of CP shall not exceed 25 per cent of the size of the issue. In case a bank/DFI intends to take up the whole issue or invest more than the limit of 25 per cent it shall be required to dispose of CPs in excess of above limit in a manner prescribed under the guidelines.

The total investment of the bank/DFI in CPs shall not exceed twice their equity. Banks/DFIs desiring to invest in CPs shall obtain prior approval from the SBP.

The guidelines further say that banks/DFIs will underwrite the issue of commercial papers only after ensuring that their total exposure, including the underwriting itself does not exceed their per party limits.

Underwriting commitments in case of CPs shall be assigned a weightage of 50 per cent for calculating the per party exposure limits.