RBI's tighter norms for working capital would increase NPAs: India Inc

RBI proposed that at least 40% of sanctioned working capital limit of a company should have a term loan component

The finance heads of Indian companies said the Reserve Bank India’s (RBI’s) proposal to limit the working capital facilities is “micro-management” and impacts their businesses negatively, with many companies even defaulting on loans.

On Monday, the RBI proposed that at least 40 per cent of the sanctioned working capital limit of a company should have a term loan component. For borrowers with an aggregate fund-based working capital limit of Rs 1.5 billion and above from the banking system, a minimum level of ‘loan component’ of 40 per cent will be effective from October 1, 2018.  This 40 per cent loan component will be revised to 60 per cent, with effect from April 1, 2019, the RBI said.

“At present, the companies just pay the interest component of the working capital loans and roll over the loan at the end of the year. By bringing 40 per cent of the limit as term loan, the move would result in higher cost of funds of all companies and at the same time, banks’ bad loans will increase,” said the head of a large conglomerate. “There will be cost associated with 40 per cent term loan component, which was nominal earlier,” he said.

Banks provide working capital finance by way of cash credit, overdraft, working capital demand loan, purchase, discount of bills, bank guarantee, letter of credit, factoring, etc. Cash credit is by far the most popular mode of working capital financing.

“While cash credit has its benefits, it also poses several regulatory challenges such as perpetual rollovers, transmission of liquidity management from the borrowers to banks/RBI, hampering of smooth transmission of monetary policy, etc,” the RBI said, while justifying its move on Monday.

“To my mind, this step is also to gradually reduce bank exposure to Indian corporates. Sanctioned working capital amount is absolute and does not get reduced over the period as long as it gets renewed every year. With this proposal, the term loan portion will have to be paid back, depending on the tenor and also on whether the loan is demand or amortised or bullet. Hence, corporates will have to return 40 per cent of the working capital they used to enjoy over a period of time. The jury is out on the view how the companies will run their business with lower working capital once the working capital-term loan is paid off. Its impact on business viability will have to be assessed,” said Prabal Banerji, head of finance at the Bajaj group.

Bankers said Monday’s move is micro-management on the part of the RBI. “The commercial flexibility without breaching rules is necessary in a banker relationship for timely availability of funds,” said Banerji.

Rakesh Bharti Mittal, president of Confederation of Indian Industry, said the banking system has to ensure borrowers are not discomforted by the proposed changes in the rules for working capital. “We will seek feedback from members on draft rules in the next few days,” said Mittal.