Commercial banks are the chief source of short-term funds in India. Companies generally secure bank credits by pledging receivables and inventory. Credit lines are usually set for one year and renewed or expanded annually. The overdraft was the most common form of bank financing, but that is changing following amendments to the cash working-capital facility system (see below).Commercial paper (CP) fluctuates in importance as a source of funds. When liquidity is high and banks are eager to lend, better-rated companies offer this paper; but when liquidity is tight, banks stop investing in CP, which offers lower rates.Companies that export may get subsidised rupee credit against their pre-shipment and post-shipment export requirements. The Reserve Bank of India (RBI—the central bank) also allows foreign-currency pre- and post-shipment credit.Banks are free to set rates for all credits (but priority-sector loans under Rs200,000 are capped at the bank’s benchmark prime lending rate). An April 2001 credit policy permitted banks to lend below their benchmark prime lending rates (BPLRs—rates charged to standard borrowers). The 2000 budget abolished a 2% tax on interest payments that banks used to pass on to borrowers.Banks have instituted more rigorous credit checks for all firms, following the introduction of international-style prudential norms. Credit reports exchanged between banks still tend to be superficial, but the RBI has now started making available the names of loan defaulters.Foreign firms are subject to the same credit approval and checking process as domestic companies. When a new foreign venture first enters the country, banks may ask for parent guarantees. There are no restrictions on paying charges or commission (direct or indirect) to the overseas guarantor for such loans.Banks have complete flexibility in their assessments of the working-capital requirements of borrowers, but restrictions still apply on directed credit, quantitative limits on lending (such as against shares or lending for consumer durables) and prohibitions of credit (such as rediscounting of certain bills earlier discounted by “non-banking finance companies”). Banks are free to fix the loan period and the spread over various maturities. They may also allow borrowers to invest their temporary surpluses in short-term money-market instruments, such as term deposits, certificates of deposit or CP. To improve credit to companies, banks are also allowed to offer companies bridge loans of up to one year against expected equity and debt flows from abroad.Since 1995 the RBI has gradually increased the short-term loan component of the working-capital facility. For borrowers with working-capital limits of over Rs100m, the minimum short-term loan component is now 80%, and the overdraft component is now 20%. However, in 2001 banks were allowed to change these percentages in individual cases. Borrowers with credit limits of Rs100m and under are free to negotiate the short-term loan component with the bank.A bank may lend no more than 15% and 40% of capital funds to a company or industrial group, respectively, which they can raise to 20% and 50% respectively for infrastructure projects. In addition, bank boards can raise all these limits by another 5% in exceptional circumstances. Smaller banks prefer to operate in a consortium, since they can rely on the credit appraisal of the lead bank.SOURCE: Country Finance


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