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Saturday, December 3, 2016

Credit Substitutes


Bank loans to firms have been contracting.

This does not mean business activity in the country is also slowing, as there are a host of credit substitutes that companies use. While companies, both big and small, use them for funding their operations, investors tap into them in the hope of financial gains.


Governments, too, access them to fund developmental projects


Bond:

Bonds can be issued in the financial market by borrowers comprising both the government and corporates. While the issuing parties get the funds they need, the buyers of the bonds are assured of periodic interest payments over the tenure of the bond.

These are often longer term instruments, typically, for 3-5 years.

However, government bonds are even longer tenured and are issued for up to 30 years at times.

Company Fixed Deposit:

Fixed deposit or FD is an instrument issued by a company that guarantees a fixed rate of interest. It is an attractive instrument for people to park their savings. Financial institutions (FIs) and NBFCs (non-banking finance companies) also accept such deposits.However, these deposits are unsecured and the interest rate depends largely on the financial strength of the particular corporate and its ratings.

Commercial Paper:

Commercial paper (CP) is an unsecured money market instrument issued in the form of a promissory note by companies, NBFCs and other FIs to raise money for their short-term working capital requirements. Their tenor ranges from 7-180 days and can be traded in the secondary market.

Convertible Bond:

A convertible bond is a kind of debt instrument that can be converted into a specified number of shares in the issuing company or cash of equal value. Convertible bonds are generally issued by companies with low credit rating and high growth potential.These are popular choices when stock market conditions are conducive for investments.

External Commercial Borrowing:

External commercial borrowing (ECB) is an instrument used in India to facilitate access to foreign money by Indian corporations and public sector undertakings. It includes commercial bank loans, buyer's credit, supplier's credit, and securitised instruments, among others. Borrowers have to follow the Reserve Bank and government regulations to access such funds.

Inter-Corporate Deposit:

ICD is a deposit made by a company that has surplus funds to another company for a maximum period of six months. It is a source of short-term financing.However, with the development of other money market options for shortterm funds, the ICD market is not very popular these days.








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