Corporate Lending – Evolving Cash Flow Based Lending

by Steve Murphy 0

corporate lending

The biggest challenge to reading this referenced piece (for those readers not familiar with the India market) is a number of market-specific acronyms along with the double conversion of the Indian numbering system as well as FX back to a familiar number.  Once past that it is a lengthy summary of corporate lending and how that may be shifting to more reliance upon working capital credit, or cash flow lending as described.

According to RBI quarterly data of December 2017, the gross bank credit to industry (Micro & Small, Medium & Large) was Rs.26.34 lakh crore and it reflected contraction of 1.70% as compared to March 2017. Apart from increasing Non-Performing Assets (NPAs), high-interest rate scenarios, global uncertainties, various measures by central government and regulator’s impetus on the growth of bond market have reduced corporate India’s credit dependency on banks. Corporates have been increasingly meeting their funding requirement from bond markets instead of from banks. As per reports, the corporate bond issuances rose to a record high of Rs.6.70 lakh crore in FY 17, registering a growth of 36% year-over-year. The incremental bank credit, on the other hand, grew by 8.7% (Rs.6.3 lakh crore) during the same period. The bond market also getting preference due to faster transmission of rate cuts by RBI compared with banks. 

A conversion of Rs. 26.34 lakh crore (above quote) brings us to about $402 billion.  So this piece covers a fair amount of territory, but in effect with the expected GDP in India to hover at 7% in the next few years, the author wonders how the investment growth will be funded and the current level of non-performing assets. A discussion ensues about some of the shortcomings of primarily collateral based lending (think of OREO in a foreclosure scenario), since bankers are risk managers, not necessarily skilled (or interested) in disposing of collateralized physical assets.

A prima facie analysis of lending practices of banks provide that banks have been increasingly focusing on consortium/MBA lending based on collateral comfort while considering corporate funding. The asset coverage ratio based on collateral forms one of the major factors in risk assessment during appraisal of financing proposals. It has been proven that despite the comfort of collaterals, recovery from NPA cases has not been easy, it requires fighting long legal battles, and despite that the recovery percentage remains to be quite low. These results force us to a conclusion that comfort of collateral if not has been proven myth then it has also not been proven realistic also. Taking possession of an asset/property and then selling it off requires a different spirit and skill set which has not been at least forte of bankers. With the progress of Insolvency and Bankruptcy Code (IBC), the resolution of NPAs now although appears to be time-bound, however, this route is still evolving and yet to prove its success.

We have been discussing the benefits of working capital discipline for some time and the follow-on opportunities in alternative financing that flows from understanding and closely managing the cash cycle. Interesting to read how this also translates into a complicated and growing market such as India.

Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group

Read the quoted story here