Commercial Paper (CP)

Commercial paper lets a creditworthy company borrow directly from the money market instead of taking a bank loan. It is unsecured, meaning no collateral backs it; lenders rely purely on the issuer's credit standing. Because it is short-term, CP is a cheaper, faster way to fund near-term cash needs like inventory and receivables.

How it works in India

CP is governed by the RBI's Master Direction on Commercial Paper and NCDs (2024). Key features are tightly specified: CP must be issued in dematerialised form, with a minimum denomination of ₹5 lakh and in multiples thereof. The tenor ranges from a minimum of 7 days to a maximum of 1 year. It is issued at a discount to face value (it pays no separate coupon), and embedded call or put options are not allowed.

Credit rating

An issuer must obtain a short-term credit rating from a recognised agency such as CRISIL, ICRA, or CARE, and the CP cannot mature beyond the validity of that rating. The rating is the heart of the instrument: since CP is unsecured, its grade tells investors how safe the loan is. A downgrade can sharply hurt the value of outstanding paper.

Why it matters

For companies and NBFCs, CP is a flexible, low-cost funding tap. For investors, it is largely an institutional product: the ₹5 lakh minimum keeps most retail investors out of buying it directly. Instead, most Indians own CP indirectly through debt mutual funds, especially liquid and money-market funds, which park large portions of their portfolios in CP. That makes the credit quality of CP a real concern for ordinary savers. Past episodes such as the IL&FS and DHFL defaults showed how souring short-term paper can hit liquid and credit-risk funds. Before parking idle cash in a debt fund, it is worth checking the rating profile of the CP and other instruments it holds.