The 8/11 announcement by PM Modi has signalled the end of an era of cash economy. The backbone of any business is the availability of finance and this financing is done by various lenders to these businesses which then sits as assets on the books of the lenders and so it would be interesting to see how the assets business could get impacted because of this.
Increase in Working Capital Requirement: The working capital requirement of a business is typically computed on the basis of the historical and projected financials. However with changed business dynamics there could be some serious changes required here. The under-reported turnovers of the small businesses would now need realignment as consumers change their behaviour on payment means and the role of cash in the non-reported turnovers must be reworked, as cash becomes a rare plus a traceable commodity – in short term at-least. So what does it do the credit demand? In this changed scenario the small businesses would be further starved for working capital and hence will require more institutional lending for the businesses to continue.
However, their current reported business levels may not justify this additional lending, leading to a mismatch. As businesses try to manage their finances through various means, there would also be a realignment of the projections towards a more realistic picture. The growth rates assumed normally by lenders may have to be recalibrated as non-reported turnovers start moving towards reported turnovers. Lenders would now need to know how much of it is real and needs absorption. This is best done when there are some estimates which provide what percentage of turnover is reported turnover and thereby providing the actual possible business turnover. The rationalisation of projections in light of this real phenomenon needs to be part of business understanding while extending the credit. Possibly the demand for alternate funding facilities will also increase as pure working capital lenders take time to adjust their practices.
Increase in the Risk Profile of borrowers: The change in the business play field would mean that the risk profile of businesses undergoes a change. The businesses which till now were classified as low risk business may all of a sudden become high risk business from lenders perspective. The inability of businesses to manage their funding cycles and take this shock may even result in some mortality for these businesses. What this implies for lenders is they might move their focus to secured loans for businesses they see having higher risk. This will create a supply for more loan against property, gold loans and other collateral backed loans. The salaried retail segment may also appear as a sweet spot for the lenders.
Collection performance for lenders to be adversely impacted: The repayments coming on time is critical performance measure for the lenders. Typically most repayments happen in first 10 days of a month. The timing of this announcement will cause loss of precious 4-5 days in terms of collecting the receivables this month. NBFCs that collect EMIs in cash might face have much deeper concerns. Not only will cash collections take a hit, but there will be a segment of borrowers who might cause more NPA pain to the lenders now.
Existing home loan and mortgage portfolio could see some stress: With real estate sector getting impacted the most due to the cash factor there, there could be a potential correction on real estate prices. With property prices moving southwards the LTV exposures will be adversely affected and could lead to risk weights going up on the assets. The sudden drop in property prices can have a snowballing effect on portfolio delinquencies.
Unorganised segments will be hit: With cash becoming a rare commodity the unorganised lending market will cease. Hence the credit requirement will further go up. This means there could be more players who can fill in for them by offering more innovative solutions to fill this large gap and Fintechs could have a large play here. The unorganised segment on the retail side will have more challenges as it will now have tough competition with organised retail. Employees of unorganised segment may also face heat as cash crunch always leads to a cascading effect in the value chain.
By Manish Chaudhari, CoFounder and CRO of CoinTribe Technologies Pvt.