By James Mathew
Many cash surplus companies are laughing all the way to the banks, earning extra gains from their investments in the liquid fund market
Even as the Indian financial market is fighting a severe liquidity crunch in the aftermath of the IL&FS payment defaults, many cash surplus companies are laughing all the way to the banks, earning extra gains from their investments in the liquid fund market.
The tight liquidity situation has also led to more Indian companies now turning to their suppliers and vendors, especially those from overseas, to tie up long-term supply credits at comparatively lower interest rates compared to the overdraft facilities from Indian banks.
So far, mainly airline companies have been using such long-term supplier credits to finance their aircraft purchases from the manufacturers.
India-based companies, especially the ones with better credit ratings, are able to save 3-4 percent on interest rates on such supply credits from their overseas supplier credits and in some cases from some of their Indian suppliers and vendors who arrange funds from overseas financial institutions and other sources, according to a top finance executive in a manufacturing company which is in the process of securing such a deal with its overseas raw material suppliers. He did not want to be identified.
On the hike in the returns in the short-term liquid fund market, CFOs in some of the cash surplus companies and money market managers told Arabian Business, the return on investments in the short-term liquid fund market has shot up to 7 percent in the days after the IL&FS imbroglio broke out, from 5.5–6 percent return prevailing 12 months.
Cash surplus companies and corporate groups deploy funds with leading mutual funds, who, in turn, lend these funds to borrowers, mostly in the housing finance and NBFC (non-banking financial companies) sector for periods ranging from 30 days to 90 days.
Interest rate payment on such lending – whether monthly or on maturity, is decided between deploying corporate and the borrowing entities, many managers involved in such deals said.
The short-term liquid fund market in India is estimated to be up to $685 million.
“The size of the short-term liquid fund market has not changed but the interest rate earned on funds deployed in this market has seen a 1 – 1.5 percent increase in the last few days to 7 percent,” R Guha, CFO, Akzo Nobel India, said.
Some of the market players, however, said there is a higher degree of risk involved with such lending in short-term liquid fund in the prevailing tight liquidity market situation.
“When NBFCs and housing finance companies themselves are in a tight spot currently and are selling some of their quality assets to banks to raise funds, lending to such companies could be risky in the current market situation. So, only those companies which are ready to take such risks could be deploying funds in the liquid fund market,” a leading financial consultant told Arabian Business.