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Fiscal 2020: Winds Of Change For Corporate Borrowings

BloombergQuintOpinion

As corporations sit down to close their books for 2018-19, they may want to keep a wary eye out on the year to come. Three large changes in the way corporates borrow are on the anvil, which, together could push up the cost of borrowing and force greater discipline. In the process, some moments of disruption cannot be ruled out.

The first of the three changes that will kick in on Apr. 1, 2019 is the final leg of the RBI’s guidelines for large corporate borrowers.

Back in August 2016, the RBI had started a process of steadily reducing the incremental exposure of the banking system to large corporates. The regulation had stemmed from the experience during the ongoing bad loan cycle, in which a handful of large corporates had borrowed excessively from banks. This put the banking system at risk when these corporates started to default.

In response, the RBI created a category of ‘specified borrowers’. These specified borrowers would be allowed to borrow 50 percent of their incremental funding requirements from banks. But anything beyond would attract increased provisions and a higher risk weight. These ‘specified borrowers’ were defined as those which had more than Rs 25,000 crore in ‘aggregate sanctioned credit limit’ across banks in 2017-18.

In 2018-19, this limit came down to Rs 15,000 crore and it will further reduce to Rs 10,000 crore starting April 1, 2019.

The result will be that firms with borrowings higher than Rs 10,000 crore from the banking system will need to access debt markets or overseas borrowings more actively. Should they find it difficult to do so in a cost effective manner, either due to liquidity conditions or interest rates, they can go back to banks but they will pay a higher cost for those borrowings as well.

A second impending change is linked to the first.

Starting next year, large corporates will also have to contend with a regulation introduced recently by the Securities and Exchange Board of India.

In September 2018, SEBI cleared a proposal to mandate that corporates with outstanding borrowings of Rs 100 crore or more and a credit rating of AA or higher would need to raise at least 25 percent of their incremental borrowings through corporate bonds.

A CRISIL analysis had shown that 444 companies fall into this category. Together, they accounted for 35 percent of the total credit outstanding of Rs 130 lakh crore as of FY18. CRISIL added that 210 of these companies were already sourcing a quarter of their funding needs from the corporate bond market. The remaining 234 companies would drive the incremental issuance in FY20, said CRISIL. In simple terms, you will see more corporates tap the debt markets for larger amounts of money.

CRISIL estimates that this could mean an additional Rs 40,000-50,000 crore in corporate debt issuances for next year.

It is tough to say how easy or difficult this will prove to be.

While the early part of the year may see a steady interest rate environment, higher policy rates in the second half of the year have not been ruled out by economists. Similarly, while bond yields are reasonable at the current juncture, higher market rates due to large government borrowings cannot be ruled out later in the year.

As such, corporates may have to plan and stagger out their market borrowing requirements from the start of the year rather than wait till the end. Should they feel that bond market borrowings are not cost effective beyond the mandatory amount, they will go back to banks but may end up paying more for those bank borrowings. A third option for corporations could be to tap overseas borrowings to a greater extent. This, too, would depend on the prevailing market environment globally and the view on Indian currency and Indian credit.

Apart from thinking-through their long term borrowings, corporates will also need to manage short term liquidity needs better from next year.

The changed working capital rules put out by the RBI late last year will also kick in from Apr. 1, 2019. These rules state that borrowers having an aggregate fund based working capital limit of Rs 150 crore and above would need to ensure that 40 percent of this is in the form of a “loan component.” Also banks will have to set aside capital against the unused portion to a working capital facility.

As BloombergQuint explained earlier, the impact of this regulation will be felt in two ways – banks will sanction lower limits in the form of cash credit and firms will have to ensure that banks are willing to sanction the loan component of 40 percent.

Some believe that this regulation will prove to be the most onerous of the lot.

According to an analysis by India Ratings and Research, the new rules will require a rollover of Rs 4.1 lakh crore in working capital loans for FY20.

The rating agency estimates that about Rs 1.9 lakh crore worth of debt could face “a high or very high” rollover risk due to weak operating cash flows. “The implementation of the new RBI guidelines could put at risk Rs 5.24 lakh crore worth of debt; this could result in an increase in potential stress and extend the non-performing asset recognition cycle for banks to FY20,” said India Ratings in a study in January 2019.

While each of these changes, individually and collectively, will eventually improve India’s credit economy, it may not be easy on corporates, banks and the markets in the early days.

Ira Dugal is Editor - Banking, Finance & Economy at BloombergQuint.