Investors looking to place their capital in the country’s financial market may enjoy an added variety of instruments now that Bank Indonesia (BI) had issued a regulation on commercial papers trading.
Commercial paper is a short term debt instrument issued by a corporation in need of additional working capital, usually with one year or less in maturity.
BI issued on Jan. 2 BI Board of Governors Regulation No. 20/1/PADG/2018 on the issuance and transaction of commercial papers in the financial market, detailing the mechanism for non-banking corporations wishing to issue commercial papers.
The regulation also details the process for “supporting institutions” in commercial paper transactions, such as public accountants, underwriters and ratings agency, to register at BI.
Since the regulation was issued, BI has seen registrations by the aforementioned institutions and is circulating details to related parties, said BI’s head of financial market development, Nanang Hendarsah, adding that he hoped corporations would soon issue their own commercial papers.
“For the past months, we have been disseminating the regulation to supporting institutions, potential issuers as well as potential investors. Hopefully, it won’t be long until potential issuers register themselves to BI,” he said in Jakarta on Friday.
Nanang added that the instrument would complement existing ones available in the financial market, as well as increase the effectiveness of the central bank’s monetary policy transmissions.
“The purpose of [the regulation] is to add more sources of short-term financing in the financial market, increase the effectiveness of [BI’s ] transmission of monetary policies and aid financial market deepening,” he said.
Only non-bank corporations with investment-grade ratings can issue commercial papers.
“The [investment-grade] provision is important because we want to ensure that the issuance of commercial papers is done prudently,” Nanang explained.
As the regulation stipulates, eligible non-bank corporations who wish to issue commercial papers must have an unqualified opinion in their audit and must not have defaulted in the past three years. Similar stipulations also apply to new corporations that are less than three years old.
Nanang also said that commercial papers were intended for only institutional investors, such as pension funds, among others, given their short-term maturity and relatively high price floor.
The minimum purchase for commercial papers was set at Rp 500 million (US$ 36,356), if the papers are rupiah-denominated, or $50,000 if the papers are forex-denominated, as stated in Central bank Regulation (PBI) 19/9/PBI/2017.
The PBI also stipulates that issued commercial papers must have a minimum price of Rp 10 billion in rupiah0denomination or an equivalent of $1 million in forex-denomination.
Non-bank corporations can issue their commercial papers at one time in a single year or through a series of issuances over the same period.
Nanang projected that commercial papers to have a yield between 7.1 and 7.5 percent if issued concurrently, and an 8.3 percent yield if issued at one time, according to BI’s assessment.
Such a yield is better for investors when compared to deposits, which have an interest rate of between 5.6 and 6.6 percent, Nanang said.
“For investors, [commercial papers] are an attractive instrument to diversity their investment portfolio. It is also an alternative short-term investment with a better yield compared to available instruments in the financial market,” he said, adding that BI also allowed commercial papers in secondary market.
Banks will also be able to commercial papers as a form of intermediation, and use the secondary market to sell papers when they need liquidity, he said.
The issuance of commercial paper was a common practice in Indonesia in the 1990s. However, the instrument proved to be unpopular among investors as default risks rose during the 1998 financial crisis.
Trimegah Sekuritas chief economist Fakhrul Fulvian said the instrument could gain the market’s trust as only corporations with investment-grade ratings could issue commercial papers.
Source: The Jakarta Post