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Last Updated : Jan 03, 2020 12:27 PM IST | Source: Moneycontrol.com

PSBs may adopt cash flow model, ditch asset-based funding: Report

JPMorgan CEO Madhav Kalyan has been enlisted to head a committee to deliberate on the same, sources said

Public sector banks (PSBs), starting with the State Bank of India (SBI), are looking to update their corporate lending practices from the present asset-based funding model to the one that is more reliant on measured cash flow statements, The Economic Times reported.

The matter was discussed during the Indian Banks’ Association meeting in December. JPMorgan CEO Madhav Kalyan has been enlisted to head a committee to deliberate on the same, sources told the paper.

Moneycontrol could not independently verify the report.

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Under the new model, to avail working capital loans, companies will be required to provide banks with their cash flow statements on a frequent basis. It would be a significant move as PSBs cover over 55 percent of the loan market.

While the SBI proposed the mechanism in order to check the misuse of borrowed funds and enable banks to gauge entities’ ability to service loans on time, it has been taken into consideration by the industry, one of the sources added.

The asset-based model has been deemed flawed as these do not help companies settle loans whereas cash flows showcase a clearer picture.

The new method would also allow banks to prioritise their fund deployment as small businesses often draw smaller amounts due to late vendor payments, while big companies with large distribution supply usually have prompt payments and hence surplus finance from banks.

The working capital requirement is calculated as the difference between current assets and current liabilities ,wherein 25 percent is met by the entity and the banks fund the remaining in credit-cash (with a predetermined limit or drawing power). This would differ for seasonal industries such as sugar, fruits, etc.

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First Published on Jan 3, 2020 12:27 pm
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