Indian companies will have to stagger their expansions as financial institutions have started tightening lending to cope with the liquidity crunch in the aftermath of the turmoil in financial markets.

"Every bank has adopted a wait-and-watch approach. If they have sanctioned loans, they are putting disbursals on hold. If they have disbursed, they are asking us if companies can postpone drawing the same by 15 days/month till the mess subsides," said Ashutosh Agarwala, CFO, strategic finance, GMR Infrastructure [Get Quote].

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"The banks have almost put an embargo internally till the situation in the financial markets, which had gone haywire last week, redeems itself in the next 15 days to a month," added the CFO with a large corporate house.

Banks, which have sanctioned loans but not executed the loan agreements, now want to renegotiate them. Foreign currency loans are difficult as banks have run out of dollars. Earlier, companies used to avail of the inter-bank, correspondent lines, but companies are discovering that even those lines are frozen.

"There's no overseas loan or debt market on Monday. Some liquidity was there in the bank loan market till a few days back, but it's not there on Monday," said a CFO. So, firms that had planned to go for a foreign currency loan are lining up for rupee term loans, pushing up the cost of these loans by 30-100 basis points.

But it's the tightening of working capital that's hurting companies, which can impact operations. Many companies rely on suppliers' credit to fund imports - typically, companies open an LC every month to fund the import of raw materials, which has to be paid in six months. Overseas branches of Indian banks like Bank of Baroda [Get Quote], Bank of India [Get Quote] extended buyers credit, which has completely dried up.

"Short-term funding is becoming scarce, especially buyers or suppliers credit. This will severely affect imports of raw material," said Seshagiri Rao, CFO, JSW Steel [Get Quote].

Corporates rely on buyers' credit to fund imports as they are cheaper (3 per cent) than rupee working capital loans. And, even if banks are willing to offer buyers' credit, they are charging a higher margin, thus negating the savings.

Corporates still have a few funding options. One such source for long-term funds is the export credit agencies like Germany's Euler Hermes, Canada's EDC or the Japanese EXIM Bank, which fund imports from respective countries. Funding is still available from these ECAs but they involve a longer process (six months), and companies have to approach them along with their suppliers.

But what's interesting is that funds from ECAs are significantly cheaper and are available for a longer tenure (10-13 years, including three years of construction). These funds come at an interest rate of only 5 per cent against rupee term loans, which come at 14 per cent on Monday. Companies can save a lot in interest costs if they choose not to cover these loans. Typically, imports form 30-40 per cent of project costs (large, industrial project) and corporate groups like JSW are using ECAs to fund the debt component (85 per cent) of project imports.

Yet another source for corporates can be non-convertible debenture placements with institutions like Life Insurance Corporation or mutual funds.

But this window is available only for corporates with a proven track-record (credit rating of AA and above). Companies can raise anywhere between Rs 500 crore (Rs 5 billion) and Rs 2000 crore (Rs 20 billion) but the institutions that can be tapped are limited. The cost of funds is only 11-12 per cent against 13-14 per cent being charged by banks.

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Besides, a lot of companies will start tapping private equity and venture capital firms. Real estate companies like DLF and Unitech have already raised money from them using convertibles, quasi-debt instruments, which will be in vogue. These are not the traditional private equity firms, which invest in unlisted firms, but those backed by hedge funds, whose considerations are different.

"They are much more considerate about things such as a say in management or due-diligence and are betting on established companies," said GMR's Agarwala.  Besides, merchant bankers are working on new instruments - convertibles issued on a rights basis with an option to convert them into equity at a premium of, say 20-50 per cent to the prevailing share price anytime within 5-7years. The rate of interest for corporate is 3 per cent lower than those on normal term loans.