Borrowings Requirement

Introduction:

The Treasury Department should review the company’s cash position/forecast monthly or more often, if required Actual sustained Overdraft levels or expected shortfall of funds, as per amount limit sanctioned by corporate and beyond a period will trigger the borrowing decisions. The instrument & rate of borrowing & the lender will be decided based on the requirements of maturity cost & liquidity. In case there are high PLRs (Prime Lending Rate) of the banks, corporate efforts should be directed towards sub-PLR structured borrowings. The selection of landers will be made after rounds of negotiation.

?PLR Vs. Sub-PLR:

What is PLR?

The Reserve Bank of India does not set these rates, but in a broad way stipulates the interest rates in the economy. The PLR is influenced by RBI's policy rates - the repo rate and cash reserve ratio - apart from the bank's policy. In simple words, the availability of funds in the banking system and the demand for credit by consumers (both retail and industrial) determine what the BPLR should be.

By definition, the Prime Lending Rate (PLR) or Benchmark Prime Lending Rate (BPLR), is the reference interest rate based on which a bank lends to its credit-worthy borrowers. Normally, loans are given out a little more or a little less than this reference interest rate. All retail loans are linked to the PLR or the BPLR. So, any change in it will affect the cost at which the borrower takes a loan from a bank.

What is a 'spread'?

Spread is the difference between the BPLR (prime lending rate) and the loan interest rate. This can be "x" plus or "x" minus the BPLR rate fixed by the bank.

What are Sub-PLR Loans?

Some banks provide loans and advances at a rate lower than the BPLR (Prime Lending Rate) of the bank to customers availing finance for business purposes or short-term funds for various needs (usually large companies, major exporters, and some individuals, etc.) with high credit ratings.

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From time to time, in order to get better terms from the market, the corporate should seek rating of instruments from the rating agencies. In the rating process, significant information about the current and future opportunities should be provided to the rating agencies with due care and caution.

It will be ensured that the banking person who manages the deals exercises due precaution before expressing any verbal/written commitment. All written communication pertaining to the final commitment with banks shall be restricted to a select list of authorized signatories. Banks shall be provided with the list of authorized signatories with respective resolutions.

Borrowing Instruments:

The principal borrowing instruments used/available for the short term are Cash Credit, Working Capital Demand Loan, Packing Credit, Commercial Paper, Non-convertible Debentures, Inter Corporate Deposits, and for long terms are Bonds, Debenture, etc. ?

I am going to discuss every aspect in length.

?ü?Cash Credit (CC) at PLR:

Under the cash credit facility, a corporate borrower is allowed to withdraw funds from the bank up to sanctioned credit limit. As per current RBI guidelines, up to 20% of banking limits can be availed as cash-on-tap. The corporate borrower is not required to borrow the entire sanctioned credit once, rather the borrower can draw periodically to the extent of his requirements and repay by depositing surplus funds in his cash credit account. There is no commitment charge, therefore, interest is payable on the amount actually utilized by the borrower. Cash credit limits are sanctioned against the fund limit. Though funds borrowed are repayable on demand, banks usually don’t recall such advances unless they are compelled by adverse circumstances.

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ü?Working Capital Demand Loan (WCDL) at PLR:

Working capital demand loans are packet loans for a short duration (1 to 12 months) carved out of a fund-limit facility primarily used for financing working capital needs. WCDLs have raised interest rates at PLR. Recently RBI has allowed sub-PLR options to the banks. Banks have different rates for different companies, depending upon the credit risk attached to them. As per current RBI regulations, up to 80% of banking limits can be availed as WCDL.