Coronavirus: How banks join hands to offer emergency working capital

After the moratorium requests for term loans by corporate and retail borrowers under the COVID-19 relief package, banks are flooded with requests for additional working capital requirement.  

These requests have been mostly coming from small to mid-sized companies, but large corporates are also availing short-term working capital facility (mostly for one-year) as everyone wants to conserve cash during these times. The staggered exit from the lockdown and the massive disruption in the supply chain is likely to put tremendous pressure on companies' short-term liquidity positions. Many strong companies have also availed moratorium to conserve cash as the situation is quite unpredictable with coronavirus cases on the rise in India.

As part of its Rs 3.74 lakh crore liquidity package, the RBI has permitted a fresh reassessment of working capital by banks to help the corporate restart their businesses. Over the last few weeks, the banks have hammered out a common approach to grant fresh working capital loans to avoid any discrimination or confusion among banks offering differential terms. "These fresh funds will be over and above the existing working capital limits and the COVID-emergency funds offered by banks," says Padmaja Chunduru, CEO at Indian Bank. In fact, many public sector banks proactively created Covid emergency working capital window over the last one month. Now they will look at things in totality for every corporate and open the additional working capital lines wherever there observe gaps.

It may be remembered that the Reserve Bank of India ( RBI), apart from allowing moratorium on term loans and differing of interest payment on working capital, has also allowed banks to reassess the working capital cycle of stressed corporate for further funding. The RBI has allowed banks to recalculate the drawing power by reducing the margin or by reassessing the working capital cycle. The banks have a set of rules for clearing such applications.

While banks are not sharing the details of the common approach to be followed by all banks, insiders say there could be a need for standard margin requirement by all banks. Secondly, the time given for receivables will also be common for all banks.

First and foremost, there has to be a strong justification for COVID-related impact in the company. The onus will be on the borrower to make a strong case listing out the reasons how the business cycle got disrupted on account of the nationwide lockdown. The disruption could be from domestic and global supply chain or non-availability of migrant labourers and key raw material or cancellation of orders, unpaid dues from debtor or denial of permission from state governments to move goods or no or lack of transportation.

These additional limits would be on ad hoc basis. Banks will be looking at host of factors such as the credit rating, likely sector impact post COVID disruption, the leverage, moratorium enjoyed in other loans and future cash flow position etc. The process could be slightly longer if more than a bank is involved. In fact, working capital availed under a consortium will go to the lead bank for final approval.

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