Commercial Paper: Risks and Mitigants

Presented by:
Md. Shah Naoaj
Assistant Director
Banking Regulation and Policy Department
Bangladesh Bank
Head Office
10/3/2016

Bangladesh Bank

PRESENTATION FRAMEWORK

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Background
early stage of development in Bangladesh
Eastern Bank Limited is the pioneer of CP in the country;
it raised Tk. 500 million for ACI Limited in 2013.

Since then, this market is growing very fast in our country

with approximate growth of 593.10 per cent in 2015.
The amount of current outstanding CPs is close to Tk.
1500 million.
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Background: Global Perspective

Commercial paper is a short-term debt instrument
issued by large corporations.
For issuers, commercial paper is a way of raising capital
cheaply at short-term interest rates.
For investors, commercial paper offers returns slightly
higher than Treasury bills in exchange for taking on
minimal credit risk.

At the beginning of 2007, commercial paper was the

largest U.S. short-term debt instrument with more
than $1.97 trillion outstanding.
Most of the commercial paper was issued by the
financial sector, which accounted for 92 percent of
all commercial paper outstanding.

Financial Crisis: role of CP

Commercial paper played a central role during the
financial crisis of 2007-2009. Before the crisis,
market participants used to regard commercial
paper as a safe asset due to its short maturity and
high credit rating.
Two events changed this perception.
Case of BNP Paribas
Case of Lehman Brothers

The news triggered the modern-day equivalent of a

bank run, leading to about $172 billion worth of
redemptions from the $3.45 trillion worth money
market fund sector.

Role of Fed
To stop the sudden decline in commercial
paper, the Federal Reserve decided for the
first time in its historyto purchase
commercial paper directly.
By early January 2009, the Federal Reserve
was the single largest purchaser of
commercial paper and owned paper worth
$357 billion, or 22.4% of the market,
through a variety of lending facilities.

Why did CP market fail?

Lack of policies and
regulations
Lack of supervision
Extreme credit driven
growth in housing sector
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Bangladesh Bank

Guidelines on Commercial Paper for

Banks in Bangladesh
Banks can play three major roles:
invest in CPs

act as an IPA
of CPs.

provide credit
enhancements
to CP issuers

However, Banks shall not issue CP in any form or

provide any guarantee for CPs.
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Bangladesh Bank

General Instructions to the Banks

The net worth of the issuer shall not be less than BDT 30
crore as per the latest audited balance sheet and the net
profit after tax shall be positive for the last three (3)
years.
The current status shown in the Credit Information
Bureau (CIB) report of the issuer company shall be
standard and have no track record of classified status
for last two (2) years.
The issuer shall have credit rating from an ECAI. The
minimum credit rating of the issuer shall not be lower
than BB Rating Grade-2 and S2 (short-term) as per
Risk Based Capital Adequacy (in line with Basel III)
guidelines.
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Specific Guidelines for Issuing And Paying

Agent (IPA)

In the offering document, it shall be clearly

stated that the payment will be made to the
investors provided that the issuer has made
the funds available to IPA.
IPA shall not invest in the respective CP.

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Specific Guidelines for investment

in CP by banks
The current ratio of the issuer must be at least 1:1 as
per latest audited balance sheet;
The debt-equity ratio of the issuer must be
maximum 70:30 as per latest audited balance sheet;
Banks investment in a single issue of CP shall not
exceed 20% of the respective issue.
Banks aggregate investment in commercial papers at
any point of time cannot exceed 10% of its Tier 1
capital.
Rollover of CP shall be treated as a fresh issue and
require complying with all the applicable clauses.
Rollover is limited to maximum one time.
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Provision requirements
Banks shall maintain provision against
outstanding balance of the defaulted CPs at
the following rates:
If it is past due/overdue for 03 (three) months or
beyond but less than 06 (six) months, the provision
requirement is 20%.
If it is past due/overdue for 06 (six) months or
beyond but less than 09(nine) months, the provision
requirement is 50%.
If it is past due/overdue for 09 months or beyond the
provision requirement is 100%.
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Specific Guidelines for providing

credit enhancement
Banks shall follow the BRPD Circular No.
02/2014 on Single Borrower Exposure
Limit and any amendments thereafter for
providing such credit enhancements.

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Thank you!

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