Bangladesh Bank yesterday issued a guideline on commercial paper (CP) for banks to put in place a uniform procedure for this short-term money-market instrument.

Banks are allowed to invest in CPs, provide credit enhancements to CP issuers and act as an issuing and paying agent of CPs as per the guideline.

However, banks shall not issue CPs in any form or provide any guarantee for CPs.  Banks will have to ensure that they have written guidelines approved by their board of directors for dealing with CPs.

The net worth of the issuer should not be less than Tk 30 crore as per the latest audited balance sheet and the net profit after tax shall be positive for the last three years, according to the guideline.

The current status shown in the Credit Information Bureau report of the issuer company shall be 'standard' and have no track record of classified status for last two years.

Before investment in any CP, banks should assess the issuer's overall debt repayment capacity by taking into consideration the issuer's liabilities with other banks and financial institutions to make sure that the issuer has the ability to repay.

It also said the current ratio of the issuer must be at least 1:1 as per latest audited balance sheet and 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 percent of the respective issue and a bank's aggregate investment in CPs at any point of time cannot exceed 10 percent of its tier 1 capital.

Rollover of CP shall be treated as a fresh issue and will require complying with all the applicable clauses.

Banks shall maintain provision against outstanding balance of the defaulted CPs.

Details of bank's involvements in CPs have to be reported to the department of offsite supervision.