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Unit 3: Sources of Finance



            term planning is required to ensure that cash inflow would be adequate to meet the instruments  Notes
            of repayments and allow an active turnover of bank loans. The adoption of the formal term loan
            lending by commercial banks  will not in any way hamper  the criteria of liquidity  and as a
            matter of fact, it will introduce flexibility in the operations of the banking system.
            The real limitation to the scope of bank  activities in  this field  is that all banks are not well
            equipped to make appraisal of such loan proposals. Term loan proposals involve an element of
            risk because of changes in the conditions affecting the borrower. The bank making such a loan,
            therefore, has to assess the situation to make a proper appraisal. The decision in such cases
            would depend on various factors affecting the conditions of the industry concerned and the
            earning potential the borrower.

            3.4.4  Commercial Papers (CPs)
            Commercial paper represents a short-term unsecured promissory note issued by firms  that
            have a fairly high credit (standing) rating. It was first introduced in USA and it was an important
            money  market  instruments.  In  India,  Reserve  Bank  of  India  introduced  CP  on  the
            recommendations of the Vaghul Working Group on money market. CP is a source of short-term
            finance to only large firms with sound financial position.

            Features of CP
            1.   The maturity period of CP ranges from 15 to 365 day (but in India it ranges between 91 to
                 180 days).
            2.   It is sold at a discount from its face value and redeemed at its face value.
            3.   Return on CP is the difference between par value and redeemable value.
            4.   It may be sold directly to investors or indirectly (through) dealers.
            5.   There is no developed secondary market for CP.

            Eligibility Criteria for Issuing CP
            CP is unsecured promissory note, the issue of CP is being regulated by the Reserve Bank of
            India. RBI has laid down the following conditions to determine the eligibility of a company that
            wishes to raise funds through the issue of CPs.
            1.   The Tangible Net worth (TNW) of the company, as per latest audited balance sheet should
                 not be less than   4 crore.

            2.   The company should have been sanctioned as a fund based limit for bank(s) finance and/
                 or the All India Financial Institutions.
            3.   Company can issue CPs amounting to 75% of the permitted bank (working capital limit)
                 credit.
            4.   Company’s CPs receives a minimum rating of (P2 from CRISIL, A-2 form ICRA, etc.).
            5.   The minimum size of each CP is   5 lakhs or multiples thereof.
            6.   The size of any single issue should not be less than   1 crore.
            7.   The CP is in the form of usance promissory note negotiable by endorsement and delivery.

            Advantages of CP
            1.   It is an alternative source of finance and proves to be helpful during the period of tight
                 bank credit.
            2.   It is a cheaper source of short-term finance when compared to the bank credit.




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