Lenders lend a helping hand to firms battling disruptions

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Banks are drawing up contingency cash flow support and credit enhancement schemes for mid-corporate companies affected by commodity price and supply chain disruptions.

While these discussions are at a very nascent stage, banks are seeking to pre-empt working capital disruptions for companies in the export and commodity businesses and those exposed to the oil and gas segment to prevent defaults.

“We are looking at credit enhancement support for companies affected by the Russia-Ukraine war,” said Suresh Khatankar, deputy managing director of IDBI Bank. “These mechanisms are part of our arsenal,” he said. “If working capital is disrupted due to delays, or exports are hit, so till such a time one finds an alternative, then cash flows will be impacted. In that case, the required adjustments will have to be done.”

Banks have different criteria for the classification of a company as mid-corporate, but most companies with annual revenue of ₹50 crore-₹500 crore come under this category.

Bankers are expected to look at increasing working capital limits to these companies against higher collaterals in case cash flows are hit.

“We are still assessing the impact on the mid-corporate segment, but cash flow support product is a go-to option for us as it reduces the default risk and we can look at offering loans at lower rates,” said another lender.

ET had earlier reported that bankers were worried about a fresh round of defaults in the MSME segment, as spiralling commodity prices were making businesses unviable, crimping the ability to repay loans. Prices of most inputs, such as steel, coal, petcoke or aluminium, have soared more than 30% in the past few months, squeezing profit margins.

The Russia-Ukraine war has created macro uncertainties for various sectors, especially due to the rise in energy prices. According to Nomura, every 10% increase in oil prices would shave off about 0.2 percentage points from GDP growth and lead to a 0.3-0.4 percentage point acceleration in headline inflation.

“Rise in oil prices, commodity prices and exchange rate volatility creates macro volatility, and it is difficult to gauge at this juncture the first-order or second-order impact of the same on growth or asset quality,” said Kunal Shah of ICICI Securities. “We expect the impact on bilateral trades globally and disruption in demand, supply and payment mechanisms to have some effect on forex-related revenues.”

Higher energy prices would lead to an increase in input costs, a bigger import bill and a wider current account deficit. The geopolitical situation also poses risk to financing demand in gems and jewellery and vehicle financing segments.

Companies operating in the chemicals segment are seeing a drop in margins due to crude oil price increases. The rise in steel and aluminium prices poses trouble for the automobile and real estate sectors.

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