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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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