Mitravanshi Finance funds Rs 1,000 crore with three-month commercial paper at 7.3% instead of a one-year bond at 8.1%. What does it save in a year, what happens if the paper market shuts for a quarter, and what is a 0.25% backup line worth?

Commercial paper saves Rs 8 crore a year against the bond, and with the backup line it still saves about Rs 4.7 crore in an average year. The line costs Rs 2.5 crore a year, and in a frozen quarter drawing it at 9.5% costs Rs 5.5 crore more, wiping out that year's saving but nothing else. Without the line, a freeze forces a Rs 50 crore fire sale, so the line is worth buying.

Short money is usually cheaper than long money. 0.8 points on Rs 1,000 crore is Rs 8 crore a year. But the paper has to be repaid every three months while the loans it funds run for years, so Mitravanshi must find new buyers four times a year, and the saving is payment for carrying that rollover riskThe risk that maturing short-term debt cannot be replaced with new debt when it falls due, forcing the borrower to find cash elsewhere.. Think of a shop that pays its rent with a new loan from a friend every month: cheap, until the month the friend says no.

Without a line, Mitravanshi must repay Rs 1,000 crore of maturing paper with no new buyers. The only source is selling loans in a hurry, and at a 5% discount that is a Rs 50 crore loss, more than six years of the saving in one quarter. With the line, it draws Rs 1,000 crore at 9.5% for the frozen quarter. The extra cost over paper is 2.2 points for a quarter of a year, Rs 5.5 crore.

Compare the averages first. With the line, the expected yearly saving is about Rs 4.67 crore; without it, about Rs 0.50 crore, because a 15% chance of a Rs 50 crore fire sale eats nearly the whole saving. Then compare the worst years, which matter more for a lender: with the line the worst year is zero, without it the worst year is a large loss that could also trigger a rating downgrade and make the next rollover harder still.

Two limits to state. A committed line is only as good as the bank's willingness to fund it in a crisis, so spread lines across several banks and read the conditions that let a bank refuse to lend. And the line fixes a timing problem, not a mismatch: a lender funding three-year loans with three-month paper should keep most of its book on longer funding and use paper for a slice. Confirm current rules on paper tenors and backup requirements before relying on any structure.