Corporate India is now feeling the “Credit Crunch” This type of environment was seen in the year 1995 – 1996 an now the cycle is repeating itself. Corporates have not yet pressed the panic button but they seem familiar with the signs that are coming towards them. Smart players who have already seen the signs have started to tie up their long-term finances to fund projects. Those who are not yet seen the signs are rushing in to get commitments from banking. Other’s who are in the planning stages, could find themselves in trouble if the situation continues more than five to six months.
Money is still not dear as that interest rates have not yet gone up much. But, there is certainly a liquidity crunch. The availability of money in the market is shrinking. There are two types of finances a company requires. One type of finance is used for running the day to day business. The other type of finance deals with funding project expansions. Bankers like to find good projects, while others are being put under the scanner. A
“Triple A” rated company will always deny of facing a credit crunch. On the other hand, if you approach the small scale company owners, who continues to fight his day to day battle, will say that things for him now have been harden. If this type of situation continues for other six months, there could be declaration across the industry. All this makes the corporates uneasy.
Companies are now changing their point of view. They are going ahead with expansion and de-bottlenecking projects. They are actually revisiting their financing options, like external commercial borrowings (ECB’S), were once widely used by firms. But now they have become more expensive. One has to tackle this present existing credit market situation in the right way.
The credit markets are in turmoil. Companies are now looking at new instruments such as trade credits. The RBI has allowed companies to take advantage of this new instrument (trade credits). This step will help the companies to freely import raw materials/ capital goods for a period of three years against the earlier period of one year. The corporates are even getting familiar with other instruments like the ECA (Export credit agency). ECA’S are basically institutions which act as finance companies for private domestic entities who conduct business abroad.
The local companies are considering the option of placing their debt instruments with mutual funds at a fixed rate. They are also considering non-convertible debenture (NCD’S) market. JSW’S 10 million ton steel project at Bellary has achieved financial closure. However, the company expands beyond this capacity and if a credit crunch starts taking place then NCD will start getting placed accordingly. Even Larsen and Toubro (L&T) company which had tied up its long term funding requirement is now dealing with trade credits by taking a short term funding option. The market is been squeezed, both Corporates feel that a good monsoon would cool the situation and uplift the mood. But, if the situation turns out to be adverse, then it can lead to higher interest rates. A manufacturing company would never like to cut down its production. What it now requires, without any delay is future based management of working capital and inventory.