A strategic solution

Recent decision to restrict issue of LOU by banks impacted the buyers credit facility enjoyed by the corporate. In lieu of buyers credit the corporate will be constrained to resort to rupee borrowing and purchase dollar/euro/ other currencies to meet their obligation on import. Alternatively they can shift to suppliers credit , which can be part of the sanction of LC. In either case the sanctioning power will be crucial. The banks with larger flexibility in delegated power will be able to increase their exposure. Higher demand for foreign currency will result in appreciation of dollar /euro against rupee, which may help exporters in the short term. Corporate with import payment obligation will take position immediately, so the premium on foreign currency will go up. Higher demand for funds will raise the interest rate in the short term and so is availability of funds. Banks will be required to manage funds in the first quarter of 2018-19.Possible rise in the repo rate will require the banks to sell securities , which will also have an effect in the bond market.

In view of the current banking scenario , allowing flexibility in sanctioning power is a difficult option. large corporate , with adequate balance sheet strength will shift to the banks where they can immediately avail the facility. In case of public sector banks such flexibility may not be there. As such, unless an immediate strategy is developed there could be flight of business from PSBs. It is essential at this stage that a strategy is taken to ensure that good corporate are not denied credit facility in a short notice. Normally at present the sanctions are linked to internal rating of the banks, which is done at the time of review/renewal. Although external ratings are part of sanction compliance , these ratings are not directly linked to delegation of power. Till date external ratings are subject to strict due diligence and are periodically reviewed. It is possible to rate the financial & business status of an organisation from the external rating. It would be prudent at this stage to link the sanction of short term credit to borrowers with AA/A/BB+ borrowers . Such delegation can be done at the level of Corporate Branch head/ Zonal head /GM at regions. The delegation can be higher based on external rating.

It is the time for formulating the credit policy of the banks and it is necessary to improve the denominator in order to reverse the percentage growth of NPA. There should be a close look in to the delegation of power, since decision making in banks slowed down considerably. higher credit off take could partially offset the adverse impact of growing NPA. Wider delegation of power based on external rating / available credit exposure and proactive steps from the corporate office could result in an increase in credit flow. It is expected that in short term deposit rate will go up in certain time bands, so that short term fund crisis can be managed by the banks.Both ALCO and Credit Policy Committee have to decide on the policies to take strategic advantage of the situation.