Banks ease debt collection norms to support cash-strapped firms

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SummaryGiving more time to collect accounts receivable in genuine cash-flow constraint cases

Banks are relaxing collection norms on working capital loans to companies whose working capital cycles have lengthened, straining their cash flows. In cases of genuine cash-flow constraints, banks are giving companies more time to collect their accounts receivable than earlier stipulated in their loan agreements.

A senior State Bank of India (SBI) official said that in the case of working capital loans, previously, if the company did not collect a certain portion of its receivables within 90 days, these were removed for the purpose of calculation of drawing power. “Now, depending on the industry and the real need of the company, we have increased that period to 120-150 days and, in some cases, up to nine months, so that their liquidity is not impacted,” the official said.

Drawing power refers to the amount that company can withdraw from its sanctioned working capital loan amount. It is calculated by adding the total value of stock and total value of book debts and subtracting the amount due to creditors. This amount is revised on a monthly basis.

The SBI official said that the bank is extending the timeline for debt collection to companies across sectors on a need-based manner. “Payments do come in for these companies, but they come in late. In some cases, payments pile up in certain months like in the year end March quarter,” the official added.

Bankers say that cash flows of a wide range of industries have been affected for a number of reasons in the recent times. In the case of iron and steel and power, for instance, this is related to coal-supply linkages, for textiles, it is related to high cotton yarn prices and fall in export demand, and in the case of construction, slower real estate sales have hit cash flows.

Even government companies like BSNL as well as private sector suppliers to government departments are facing cash-flow strains due to delayed payments. Corporation Bank GM BK Divakara said the bank has been relaxing collection dates only on a case-to-case basis. “We are not relaxing norms across the board. If the problem is genuine and the quality of the debtors is good, we are supporting companies because their liquidity is under stress,” he said.

Divakara said the sectors that are seeing most strain in cash flows are construction contractors, manufacturing companies, independent power producers and suppliers to government companies. SL Bansal, CMD, Oriental Bank of Commerce, said many companies seeking an extension in the debt collection cycle are small and medium enterprises. “The clients to whom many of the mid-segment companies supply goods to are under stress. This is leading to irregularities in receiving payments,” he said. Bankers say small and mid-sized companies also account for the largest number of defaults and NPAs in the system.

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