The Reserve Bank of India’s new draft guidelines on the disbursement of working capital credit are likely to hit the liquidity profile of the most vulnerable companies, pushing up the default rates.
The draft norms propose 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. “The 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,” rating firm ICRA has said.
The modification in the system for delivery of working capital bank credit is intended to enhance credit discipline among the working capital borrowers. However, this would also pose liquidity challenges as entities would need to contend with larger short-term repayments. This might put additional pressure on the credit ratings of relatively weaker borrowers whose working capital management is less efficient and who have limited flexibility to access on-balance sheet or external sources of liquidity, it said.
As per the regulator-specified definition of default, a delay of one day even of one rupee from the scheduled payment date is to be construed as a default for facilities (such as WCDL) that have a pre-defined repayment schedule. In contrast, given the nature of the facilities, default on cash credit and overdraft facilities is to be recognised by rating agencies only when such facilities are continuously overdrawn for more than 30 days. “This distinction in the regulatory definition might also push up default rates upon an increase in the proportion of the loan component in working capital facilities,” it said.
It said the adverse impact might be more pronounced on entities in sectors including cut & polished diamonds, gems & jewellery (retail), media broadcasting, metals, thermal power, sugar and textiles (cotton spinning).