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Working Capital – The Status Today
 
  • PSU Banks reaffirm faith in MPBF for industry lending and 20% norm for SSI

    • Though norms for computation of Working Capital have been liberalized, PSU banks continue to adopt the formula based norms to assess working capital. This is on account of the affinity that the Public Sector has towards norm based lending which protects them from any accusation of bias in lending.

    In short, it could be said that in most cases, industries get some credit but not customized to their requirement!

  • Fear of NPAs, enquiries on bad loans and capital adequacy constraints make banks credit averse

    • Over the past few years, a combination of circumstances has made banks averse to taking on additional credit exposure. This is especially so in case of new projects where the promoter does not have a track record.
      • The introduction of globally accepted norms of Asset Classification resulted in high level of Non-Performing Assets showing up in the books of banks, which had to be written off affecting profitability and eroding capital.
      • The erosion of capital meant that banks were in danger of not meeting the newly introduced norm of 8% capital adequacy. Not achieving the 8% norm would affect credibility of the bank and possibility of accessing the capital markets for equity or debt.
      • In a number of public sector banks that faced massive erosion in capital, enquiries were instituted against officials who sanctioned the bad loans thereby making bankers more cautious of taking any kind of credit decisions.
    In such circumstances banks increasingly resorted to investing in risk-free government debt and avoided taking on industrial credit. The problem has been more acute in the small-scale sector. The sector had witnessed a high level of directed lending in the past decade most of which turned bad thereby putting off the banks from further credit to the sector. Even otherwise, the adverse impact of liberalization has been felt more in the SME sector that among larger industries.
     
  • Increased competition for good client accounts

    • Over the past few years, banks have been faced with the unenviable task of generating business while asset quality and facing growing competition in the sector. This has led to banks competing with each other for securing the business from proven clients (whether in the large, medium or small scale sector). Apart from providing competitive terms to the borrower, banks do not hesitate to provide project funding or meeting any other credit requirement of these clients in order to retain their business.

    The younger, aggressive private sector and MNC banks are going after good credit in a big way. These banks are faster, friendlier and attempt to understand the borrower’s business and fund requirements, while structuring the transaction. They work through correspondent branches to extend their reach and pffer customized solutions including cash management, demand loans against assignment of immediate committed payments and branches banking and banking through the internet.

    An analysis of the assisted units of State Financial Institutions reveals that in most cases, the proven clients have availed their subsequent loans from banks (most often PSU banks). Infact it was also seen that all good clients had been visited by more than one banker offering them better terms of credit. In many cases the existing loans of these clients to the SFC was prepaid through loans provided by the banks.

    Summary
    Given the increased focus on credit quality, banks have become increasingly choosy in providing credit to industry. At the same time, the enhanced profit orientation has meant that banks are vying with each other to secure business from proven clients. This has become particularly acute in case of SMEs where availing Working Capital from banks is no longer a matter of routine. This is especially so in case of first generation entrepreneurs who lack a track record. Considerable homework displaying commitment in the project and stable financial position of the promoter is essential for obtaining a favourable response from bankers.

    Introduction to Working Capital
    Types of Working Capital Financing
    Procedures to avail working capital from banks
    Estimation of Working Capital Requirement
     
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