"Changes to the standards of disbursement of working capital credit to reach the vulnerable cos"

The proposed changes to the disbursement standards for working capital credit would affect the liquidity profile of vulnerable businesses, said the ICRA rating agency. For borrowers with a working capital of 150 million rupees or more from the banking system, a minimum level of "loan component" of 40% should be effective from 1 October 2018, to 60% with effect from 1 April 2019, according to the draft guidelines recently issued by the Reserve Bank of India (RBI).

This means that a borrower who is currently able to fully utilize the permitted revolving bank facilities, such as cash credit and overdraft, without having to bear the repayment of principal – given the 39, lack of a predefined repayment schedule for these facilities – should now adapt to the new paradigm whereby at least 40% / 60% of working capital loans would have a defined repayment schedule.

Banks will have the discretion to stipulate repayment of the "loan component" in installments or by means of a refund by ballot, provided that the delay is not less than seven days and is likely to be less than one. year. "Repayments, as opposed to refinancing, would put pressure on the liquidity profile of borrowers, especially those who are heavily reliant on credit or overdraft facilities while lacking alternative sources of liquidity," said Lon. 39; ICRA.

According to the badysis of the ICRA, the negative impact could be more pronounced on the sectors of cut and polished diamonds, gemstones and jewelry (retail), media, metals , thermal energy, sugar and textiles.

"These are the areas where not only the average working capital debt sanctioned by entity in the badessed portfolio of ICRA is estimated at more than Rs 150 crore, but also the gross cash conversion cycle is high between 120 days to 220 days, "said the agency.

"It can be noted that the sectors where the use of working capital limits is seasonal, such as spinning textile and sugar, adapt to the new system may be less heavy because the need for funds turnover goes through the conversion to stock, "It said. "However, for those sectors where the required working capital remains high throughout the year, the credit implications of the new system are likely to be more onerous," said ICRA.

According to ICRA estimates, if an entity generally uses 40% of its limits and its repayments for the loan component are structured so that the payment is of a binary nature, it would still have a hedge 1.5 times between unused limits and the bullet-out bullet amount – a comfortable situation.

However, if the entity generally uses 90% of its limits and its repayments for the loan component are structured on a quarterly basis, the said cushion would be 0.7 times – an uncomfortable liquidity situation, said the agency.