Credit crunch

Macro economic indicators indicate a gloomy environment for India Inc with the commodity cycle at its peak, inflation at a 13-year high and possibility of political uncertainty. Even as the government tries a tight-rope walk, another reality is staring in the face of corporate India: credit crunch.

Last witnessed around 1995-96, the cycle is repeating itself. Though corporate companies have not yet pressed the panic button they seem to be bracing for the worst. Smart players, especially in the infrastructure sector, who could see the ominous signs, have already tied up their long term finances to fund projects. Those who have not yet are rushing in to get commitments from banks. Others, who are still in the planning stages, could be in trouble if the situation continues beyond 5 to 6 months.

Money is still not dear, in the sense that interest rates have not gone up much. But, there is surely a liquidity crunch. Availability of money in the market is shrinking.

There are two types of finances a company requires, one is to run its day-to-day business, and the other is to fund project expansions. While bankers are willing to fund good projects, others are being put under scanner. These are the projects which are truly facing the heat. If you go to a triple A rated company and ask them if they are facing a credit crunch, they will say no. But if you go to a small scale company owner, who is fighting his day-to-day battle, things have hardened for him now.

If the situation persists for another six months, there could be deceleration across the industry. It is this reality which is making corporate sector uneasy. A senior banker told that though companies are going ahead with expansion and de-bottlenecking projects, they are revisiting their financing options. This is because funding options which were widely used by firms earlier, like external-commercial borrowings (ECBs), have become more expensive.

With credit markets in turmoil, companies are looking at new instruments such as trade credits. The RBI recently opened this window for companies for freely importing raw materials/capital goods for a period of three years against the earlier period of one year. Instruments like ECAs (export credit agency) are also catching up with corporate companies. ECAs are institutions which act as finance companies for private domestic entities who conduct business abroad.

Locally, companies are considering the option of placing their debt instruments with Mutual Funds at a fixed rate. Companies are looking at this option. Non-convertible debenture (NCDs) market is also being considered.

Even though JSW’s 10-million metric ton steel project at Bellary has achieved financial closure, the company would consider new funding options if the company were to expand beyond this capacity. If there is a credit crunch, NCDs will start getting placed. Fixed deposits, which are not common anymore, will also find takers. Larsen & Toubro (L&T), which has also tied up its long-term funding requirement, is taking recourse in trade credits as a short-term funding option.

There is a squeeze in the market both on the equity and debt side. This is the time when convertible bonds should become popular. But there has to be a market for that. For long-term funding, corporates are still eying the old means like ECBs, which have become expensive. The industry will welcome any move by the government to ease ECB guidelines. This will not only help companies in taking recourse to cheaper funds abroad, but also assuage interest rates.

Corporates hope a good monsoon would cool the situation and uplift the mood. But, if the situation goes out of hand, it would mean higher interest rates. Fears of a slow down may be subdued now, but the industry is echoing in unison that this could mean lower growth rates. No manufacturer wants to cut production. There is already a slight slowdown. What is required without any delay is prudent management of working capital and inventory. The faster it is done, the better it will be.