RBI’s capital disbursement norms to hit vulnerable companies: ICRA

04 Jul 2018 Evaluate

ICRA, rating agency, in its latest report has said that the proposed changes to disbursement norms for working capital credit will hit the liquidity profile of vulnerable companies. The agency highlighted that Reserve Bank of India’s (RBI) plan to change disbursement norms of working capital will exert pressure on the liquidity profile of borrowers, specifically those having a high dependence on cash credit or overdraft facilities while lacking alternative sources of liquidity.

According to RBI’s recently issued draft guidelines, borrowers having aggregate fund-based working capital limits of Rs 150 crore and above from the banking system, a minimum level of ‘loan component’ of 40% should be made effective from October 1, 2018, which will increase to 60% with effect from April 1, 2019. This means that a borrower who is currently able to fully utilise the sanctioned revolving bank facilities such as cash credit and overdraft, without having to bear the burden of principal repayment - given the absence of a pre-defined repayment schedule for such facilities - would now have to adjust to the new paradigm whereby at least 40%/60% of the working capital borrowings would have a defined repayment schedule.

ICRA further underlined that Banks will have the discretion to stipulate repayment of the ‘loan component’ in installments or by way of a bullet repayment, subject to the tenor not being less than seven days and likely within one year. adding that repayments, as opposed to a rollover, would exert pressure on the liquidity profile of borrowers, specifically those that have a high dependence on cash credit or overdraft facilities while lacking alternative sources of liquidity.

Besides, it stated that the adverse impact might be more pronounced on entities in sectors including cut and polished diamonds, gems and jewellery (retail), media broadcasting, metals, thermal power, sugar, and textiles (cotton spinning). These are the sectors where not only the average sanctioned working capital debt per entity in its rated portfolio is estimated to be upwards of Rs 150 crore, but also the gross cash conversion cycle is high-ranging between 120 days to 220 days.

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