RBI Curb On Working Capital Limits To Foster Financial Discipline: CRISIL
The Reserve Bank of India’s (RBI) new ‘Guidelines on loan system for delivery of bank credit’ will lead to better assessment of working capital requirements by borrowers, and improve financial discipline among them.
Based on an analysis of its rated portfolio and interactions with market participants, CRISIL believes any widespread disruption on this count is unlikely. However, the move would require closer monitoring of liquidity, given that 60% of the fund-based working capital facilities of large borrowers shall have scheduled repayments. Further, the policy of lenders on rolling over of working capital loans (WCL) will become crucial.
As per the circular, effective July 1, 2019, borrowers with an aggregate fund-based working capital exposure to the banking system in excess of Rs 150 crore must now maintain 60% of this as a ‘loan component’. This limit has been imposed in a phased manner, starting with 40% in April 2019, and now stands at 60%. The balance 40% may be availed as cash credit facility. Further, the undrawn portion of cash credit or overdraft facilities sanctioned to such borrowers will attract a ‘credit conversion factor’ of 20%, implying higher capital costs.
The move would goad better working capital planning by corporates, aligning their limits to the cash conversion cycle. That’s because the flexibility of cash credit facilities – innumerable withdrawals and deposits (within drawing power and limits) – would no longer be available fully.
The presence of a loan component would also mean scheduled repayments, unlike in a cash credit or overdraft facility. That, in turn, will mean additional monitoring.
Says Somasekhar Vemuri, Senior Director, CRISIL Ratings, “Clearly, the objective of this exercise is to shift the onus of treasury operations from lenders to borrowers, thereby fostering greater financial discipline. While borrowers have the option to stagger repayment of the loan component, they will have to maintain higher liquidity in the absence of an on-tap credit facility for the entire fund-based limit.”
CRISIL studied the impact of the circular on its rated portfolio of ~11,000 entities. It showed the circular applied to ~3% of its ratings – assigned to large borrowers, whose ability to gauge working capital requirement, monitor repayments and mobilise funds from multiple sources is relatively better.
Of the ~350 rated entities affected by the circular, ~320 were in the investment grade. These entities had Rs 2.5 lakh crore of total rated fund-based working capital facilities of which, ~90% was rated in the CRISIL A category and above, 7% in the CRISIL BBB category and less than 4% in the CRISIL BB category or below.
CRISIL also surveyed nine bankers across the public and private sectors to gauge the impact of the circular. The findings were:
7 lenders said costs would increase due to the imposition of credit conversion factor, which will be passed on to borrowers
They were split vertically on whether there would be different rates for cash credit and WCL
7 lenders said the loan component would usually be rolled over, after taking into account the financial health of the company and presence of adequate drawing power
2 lenders said such loans may have a cooling period, which necessitates repayment of existing WCL before a fresh loan is sanctioned/disbursed
Thus, while the regulation may require bolstering of repayment tracking mechanisms, CRISIL does not expect it to have a negative impact on the credit profiles of its rated borrowers. However, bankers may opt to reduce exposure to a client in case of signs of stress, by disallowing rollover of WCL. Thus, it may impair the liquidity profile of an entity, possibly triggering a credit cliff. Hence, the frameworks bank adopt towards WCL will be the key monitorable in the road ahead.
Says Ramesh Karunakaran, Director, CRISIL Ratings, about the other impacts of the circular, “Charges that banks may start imposing on undrawn cash credit or overdraft facilities would encourage trimming down bank lines, which would free up idle capital. The loss of flexibility, hitherto provided by cash credit facility, may also drive borrowers to the commercial paper (CP) market, especially in the current declining interest rates scenario.”