Increases in commodity prices and interest rates, coupled with a weaker nominal exchange rate, could weigh on the debt protection metrics of stressed corporates.
The Reserve Bank of India’s (RBI) new guidelines for delivery of credit to corporates may account for 51% of the FY20 refinancing requirement — Rs 4 lakh crore — of the top 500 companies, estimated at Rs 7.83 lakh crore, India Ratings and Research said on Friday.
The central bank on Wednesday said that beginning April 2019, companies with fund-based working-capital limits of Rs 150 crore or more would have to avail at least 40% of the amount as a loan. The requirement would rise further to 60% by July 2019. The borrower will be allowed to draw down on the portion allowed as cash credit only after the entire loan component has been utilised.
In a report on the impact of the new guidelines for delivery of credit, India Ratings said that the current market practice is of allowing at least one day of cooling period between the date of maturity and re-issuance of a working-capital loan (WCL). “…this could change over the medium term, given that the liquidation of the long-term portion of the working capital may become onerous for the borrower with weak liquidity profile,” the ratings agency observed in the report.
Further, in extreme cases of significant deterioration in a borrower’s credit quality or limitations on a bank’s ability to lend, borrowers may face challenges in rolling over their WCLs, India Ratings noted.
The agency expects the internal liquidity of corporates to remain modest through FY19 and FY20.
Increases in commodity prices and interest rates, coupled with a weaker nominal exchange rate, could weigh on the debt protection metrics of stressed corporates. As a result, working capital requirements on an aggregate basis may rise materially, with some of the overhang expected to spill over to FY20.
There could be some impact on the commercial paper (CP) market as well, India Ratings said. “With lower revolving fund-based working capital limits available, additional liquidity in the form of unutilised bank lines could be stifled, leading to a significant reduction in the available liquidity headroom – especially for corporates with weak internal cash flows or inadequate group/parent support.”