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07
December 2018
 |
Reserve Bank guidelines (The Total Investment & Insurance
Solutions)
The new Reserve Bank guidelines on capping
fund-based bank credit to corporate is expected to increase their refinancing
needs to the tune Rs 4 trillion in the medium-term and up to Rs 7.83 trillion
next fiscal year, says a report. The
Total Investment & Insurance Solutions
According to an analysis by India
RatingsFriday, the top 500 debt-heavy corporates will need a total refinancing
requirement of Rs 7.83 trillion in FY20, of which Rs 4 trillion will be on
account of the implementation of these new guidelines alone.
The new RBI guidelines on bank credit to
corporates stipulate that the sanctioned fund-based working capital limits of
Rs 150 crore and above must comprise at least 40 percent of the loan component
while the remaining may be sanctioned as cash credit effective April 1, 2019.
The
corporate borrower will be allowed to draw down on the cash credit portion only
after the entire working capital limit component has been used up. According to
the new guidelines, the share of working capital limit is required to be
increased to 60 percent from July 1, 2019 onwards. The Total Investment & Insurance Solutions
The India Ratings report said the impact can
be significant for working capital intensive sectors, especially those into
cyclical businesses. The Total
Investment & Insurance Solutions
"The guidelines, however, allow the
lending bank to roll over the working capital limit at maturity. While the
current practice is of allowing at least one day of cooling period between the
date of maturity and re-issuance of the working capital limit, this could
change over the medium-term, given that the liquidation of the long-term
portion of the working capital may become onerous for the borrower with weak
liquidity profile," it said.
However, in extreme cases of material
deterioration in the borrower's credit quality or regulatory/financial
limitations on the banks' ability to lend, borrowers may face challenges in
rolling over their working capital limits, thereby significantly further
restricting their financial flexibility, the report said.The Total Investment & Insurance
Solutions
The rating agency expects the internal
liquidity of corporates could remain modest at best in both FY19 and FY20.
"The effect of a rise in commodity prices and interest rates, coupled with
a weaker nominal exchange rates, could weigh down on the debt protection
metrics of the stressed corporates. The
Total Investment & Insurance Solutions
As a result, total 12/7/2018 New RBI norms
capping bank credit to increase top companies' refinancing needs by Rs 4
trillion: India Ratings working capital needs are likely to rise substantially
and some part of the overhang is expected to spill over to FY20," it said.
To mitigate liquidity risk and ensure timely
payment of commercial papers (CPs), the agency considers 100 percent liquidity
back-up for outstanding CPs and other short-term debt obligations as per its
short-term ratings criteria for non-financial corporates. "Back up could
be in the form of CPs being carved out of an entity's fund-based working
capital limits, cash and cash equivalents, expected operational cash flow
sources, tangible parental support, or other forms of liquidity support,"
it said. The Total Investment &
Insurance Solutions
The agency also noted that outstanding CPs
accounted for 40 percent of the working capital debt in FY18. With lower
revolving fund-based working capital limits available, additional liquidity in
the form of unutilised bank lines could be stifled, leading to a significant
reduction in the available liquidity headroom, especially for corporate with
weak internal cash flows or inadequate group/parent support, it cautioned.
It
believes there would be a higher need for efficient working capital management
and financial cash flow discipline among corporates. The report further notes
that of the total debt, working capital borrowings for NBFCs accounted for
around 13 percent as of end March 2018 and it does not anticipate any material
impact on the assetliability management of NBFCs purely on account of the new
guidelines. The Total Investment &
Insurance Solutions
However, financial flexibility can be
marginally constrained for lower rated entities-- commensurate with their
rating levels--especially because the share of working capital borrowings is
substantially higher. Nonetheless, NBFCs have more certainty on their cash
inflows, it said. It believes NBFCs' debt mobilisation needs and repayment
schedules can be matched, considering their historic delinquency rates and
collection schedules. The Total
Investment & Insurance Solutions
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