Train lens on end-use of loans

Companies and individual borrowers will have to utilize proceeds of loans or working capital advances for the purposes that have been stated before banks. Any shift either in the goal posts or deployment of funds for purposes other than those stated before banks is untenable. Borrowers have a responsibility to be transparent on ‘end use of funds’, especially the resources mobilized from banks. Unless both sides work towards a transparent regime of funds deployment with clear milestones, stress in the banking sector as well as the balance sheet issues faced by Indian corporates are bound to aggravate. It may be tempting for a CFO to temporarily play with working capital loans either in the overnight call money market or deploy them for capital investments in projects with long gestation. Equity capital requirements are huge and many companies over-leverage their balance sheets while deploying scarce capital. In the absence of such long-term funds, CFOs routinely use working capital advances as ‘stop gap’ arrangements.

But the big question is, should such a corporate practice be allowed to continue? Such funds deployments may be well-intentioned to hasten up a project implementation that would otherwise face delays. Or, deploying working capital advances into capital account could be aimed at realizing a complex project before schedule. Thirdly, companies’ desire to grow fast quickly, could be the reason. There are corporate case studies where bridge loans are availed to get over a temporary resources crunch. But the fallout of deploying working capital advances into capital expansion plans could be disastrous for both the banking and corporate sectors. If about 30% of over Rs 24 lakh crore in working capital advances was shifted into capex accounts, as this newspaper reported on Monday, then there’s every likelihood that we are sitting on a problem – a massive asset-liability mismatch in India Inc., mirroring the problem in the shadow banking sector.

The RBI, banks and companies, especially those with drawdown limits over Rs 150-crore, will have to work toward transparent deployment of funds. Given the kind of build-up in non-performing assets, there’s every reason to worry about the end-use of working capital advances. The RBI norms made late last year should be the starting point for a clean-up act. The norm to designate 40-60% of working capital advances as term loans may look harsh but imbibing some discipline in both banks as lenders and corporates as borrowers is not a bad thing at all. CFOs may look for flexibility; banks may look away. But it’s for RBI to streamline and protect the integrity of the banking system.