Working Capital Financing - The Cheaper Domestic Route

The RBI has opened up the gateways to greener pastures for banks as well as corporates in the last credit policy by dismantling the consortium criteria, abandoning of the maximum permissible bank finance (MPBF) pyramid and the gradual increase in the demand loan component within the overall working capital limit. As banks become more agile and profit oriented the comfort that nationalised banks provided in the past is now like a fairly tale. Nationalised banks at most times accommodated their borrowers and in turn made them complacent and devoid of any treasury risks. This more than compensated for their slow speed and only a few rare cases were actually affected. Now with the increased performance orientation of many banks due to private ownership, rigid NPA guidelines and strict RBI inspections the flexibility is gradually reducing.

 

With consortium banking now freed most would tend to go to multiple banking or safer still one bank would syndicate the requirements of a corporate. The latter would be more preferable route due to possible misuse of the multiple banking route by the borrower in terms of unreported borrowings. Under the syndication route the syndicating bank would be taking larger risk in terms of borrower risk and shall definitely have to be compensated by the borrower by way of syndication fees or guarantee charges and may be also by the lending banks by way of a spread between the cost at which it lends to the syndicating bank and the borrower. This would enable the corporate to have its need based requirements assessed faster and also ensure lower costs due to competition.

The dismantling of the MPBF regime provides to the corporate an opportunity to fine tune its projected cash flows and borrow from the lending banks in tandem so as to reduce interest costs. Forecasting cash flows at times is difficult due to dependence on certain external factors and a safety margin may be assumed and improved upon. This should be viewed along with the fact that the RBI policy implies 80% of the borrowing to be in demand loans and balance fluctuating and this portion could be treated as the safety level which is sufficiently good to begin with. In seasonal industries or in industries where payments are received at a stroke probably negotiation with its bank to give a shorter duration demand loan could be done.

The third radical change is the boom for the Commercial Paper and the opportunity that it offers alongwith the attempt to have a Mumbai Inter Bank Offer Rate (MIBOR). Today even medium sized companies which have sufficient strength to raise resources for the short period in case roll over of CPs is not possible or have specific requirements can float CPs for a maturity of as less as one month and keep rolling it over for costs linked to MIBOR and ranging from between 8 to 12 per cent annually. An exercise in credit rating to raise CPs is essential and after that the credit policy has ensured that CPs are here for takes.

Almost overnight the world of finance has changed for treasury managers. Options for borrowing even for working capital requirements have increased and structured obligations, syndications, private investments etc are almost there. With blue chip accounts limited in number and even institutions now lending for short term purposes and given the easy liquidity conditions it is a matter of time before the effects trickle down to medium and even small sized companies. Overall corporates should benefit as interest rates get linked to MIBOR and come down and competition within banks increases due to dismantling of MPBF and consortium regime.

The author is director (finance), Industrial Meters Ltd. The views expressed here are his own.