In the backdrop of many large companies not fully utilising their sanctioned working capital limits, the Reserve Bank of India may ask banks to encourage such companies to source a portion of their short-term funds requirement from the bond market.
Specifically, the banking regulator has sought feedback from banks on the feasibility of encouraging large companies, listed on domestic stock exchanges, to tap the bond market for up to 10 per cent of their working capital requirement.
Banks extend working capital finance (usually of one-year duration) to meet companies’ operating expenses, purchasing inventory, receivables financing, either by direct funding or by issuing letters of credit.
The RBI’s proposal on working capital is aimed at developing the corporate bond market and ensuring credit discipline among large companies, say bankers.
Moreover, once large companies diversify their sources of working capital finance, banks will be able to step up flow of credit to the micro, small and medium enterprises.
Current limit
As per central bank guidelines, in the case of borrowers enjoying working capital credit limits of Rs 10 crore and above from the banking system, the loan component (or working capital demand loan) should normally be 80 per cent.
The balance component should be in the form of cash credit (an arrangement whereby the bank gives a short-term loan against self-liquidating security).
Banks, however, have the freedom to change the composition of working capital by increasing the cash credit beyond 20 per cent or to increase the loan component beyond 80 per cent.
The suggestion to get large, listed companies to raise a tenth of their working capital requirement via bonds comes as many of them, especially the cash-rich ones, have not been utilising the working capital demand loan (WCDL) as they have to pay interest on the entire loan amount.
Instead of WCDL, companies prefer utilising the cash-credit facility as interest has to be paid only on the portion of the funds that are drawn down.
Liquid bond market
“Once large, listed companies start accessing the corporate bond market for raising a part of their working capital finance, their operations and financials will come under the scrutiny of prospective investors.
“The character of the company will be under spotlight. This will lead to efficient price discovery of bonds and the underlying assets,” said a senior IDBI Bank official versed with the feedback sought by the central bank.
A positive spin-off from the proposed move could be the development of an active and liquid corporate bond market. Further, bond pricing can also serve as a signal for pricing fresh loans to the company.