Uppal Motors, a Noida-based dealer for Hero Honda, was hoping to ride the festive season when mostly it clocks 25-30 per cent of its annual sales. The spark is missing this time round.

"The liquidity crunch has come at a most improper time. Customers don't have money. Finance companies are not able to process (applications) as they too are feeling the crunch. It's a vicious cycle," said V Uppal of Uppal Motors.

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"I can stock up when a customer makes a booking and pays an advance. Banks have also curtailed the overdraft facility. Customer inflow has reduced as financiers such as ICICI Bank [Get Quote] and Citi Financial have exited two-wheeler financing," he added.

Existing players such as Fullerton or Cholamandalam DBS have become more stringent. They are now willing to finance only up to 60 per cent of the cost of a bike as against 80-85 per cent earlier; the customer has to now bring in 40 per cent.

Higher interest rates are also hurting car sales. Car manufacturers have been forced to extend discounts even during the festive season, when discounts are not given. Car makers say this is to compensate buyers for higher interest rates.

The cash crunch is beginning to hurt businesses. The shortage of working capital, fear finance managers, could start hurting operations of companies, even as they prepare to go slow on their expansions and put new projects on the back burner.

Hit by liquidity crunch, banks and financial institutions have slowed down lending, freezing disbursal of term loans and tightening the flow of working capital loans.

"Banks are trying to delay disbursals, with some asking clients to increase the interest rates by 1 or 2 per cent," said Issac George chief financial officer, GVK Group. The working capital crunch though isn't hurting the group's infrastructure business.

Others haven't been so lucky and have seen the funds tap drying up. Banks, for instance, are not allowing companies to further draw cash credit. What it means is that if a company has a working capital limit of say Rs 500 crore (Rs 5 billion), and it has drawn Rs 200 crore (Rs 2 billion) of cash credit, it's being told not to draw anymore.

Similarly, banks have stopped discounting letters of credit beyond 60 days. "Some banks are saying it's not possible to encash LCs beyond 60 days even for local LCs," said Seshagiri Rao, chief financial officer, JSW.

As the short-term credit lines available overseas have disappeared, companies are turning to local banks, putting pressure on the system. Oil companies used to buy oil with 60/90/180-day short-term foreign loans, which are not available now.

Bigger companies have not been affected as yet, but if the situation persists for two to three months, even they would be affected as their customers and suppliers feel the crunch. "Where's the working capital cycle if customers don't buy," said Rao.

Sterlite Industries, however, says the credit squeeze has not affected the company it is sitting on $6.5 billion in cash. However, Chief Financial Officer Tarun Jain said, "Our customers are feeling the impact as short-term foreign loans, used for buying raw material, are not available. Besides, their cost of borrowing has gone up by 300-400 basis points."

Some have tried to work around the problem. Two-wheeler major Hero Honda has tried to help its dealers stock up for the festive season by getting Rs 425 crore (Rs 4.25 bilion) of temporary working capital limits sanctioned from group firm Hero Honda Finlease. This may not help if lesser availability of finance keeps customers out.

"Some of our vendors who had taken term loans for expansion are having difficulty as liquidity has dried up. Some of these projects are near completion, but banks are holding back disbursals," said Ravi Sud, CFO, Hero Honda.

"If the current liquidity situation continues much longer, it's going to seriously start affecting the real economy. Investment plans will go on hold and even organic growth will come under pressure if working capital is not available," said UB Group CFO Ravi Nedungadi. UB is the country's leading liquor manufacturer.

Companies feel the recent cash reserve ratio cuts by 150 basis points, which is likely to infuse Rs 60,000 crore (Rs 600 billion) may not be enough. "When the Reserve Bank of India [Get Quote] is selling dollars, they take back the rupees. It's a parody. On one hand, they are pumping in rupees and on the other sucking out rupees (to stem the rupee's depreciation)," said George.

Experts feel the central bank needs to continue with its measures to boost liquidity and explore the possibility of cutting the repo rate, SLR. "It's a complex situation and liquidity may not improve overnight; things may improve only early next year," said George. Till that time, companies will have to slow down their projects.