Unlocking Liquidity: The Treasury way

Amit Gupta, Deputy Chief Financial Officer, Arka Fincap Limited

LIQUIDITY” has been a buzz word since last year. Nationwide Lockdown announced due to the pandemic impacted various business houses in several ways. Shutting down non-essential enterprises for a major part of the year hit their businesses. Small Businesses are the major driver of workforce in the country and they have a dependency on daily inventory churn and wages. Repeated lockdowns across the country have been putting uneven pressure on their cash flows.

The impact of the same was visible in the financials of business houses. Focus of management shifted to liquidity. Managing working capital and cash flows during the crisis was a concern for all institutions as they had to service their contractual obligation.

The Central bank and the Ministry took a lot of initiatives in pumping liquidity into the ecosystem and ensuring that the economy gets least impacted. Various innovative ways were implemented to inject liquidity across various tenors in the hands of actual needy individuals/institutions. RBI had infused ~INR 4 lakhs crores during the period via various mechanisms like CRR cut, TLTRO, TLTRO 2.0, SLS, etc. Reducing repo rate in excess of 100 bps over the period was the need of the hour. However, the risk averseness of lenders continued, leading to money flowing back to reverse repo. Reverse repo was highest at ~INR 8.5 lakh crores during the period.

Overall, the liquidity was maintained and large corporate houses availed the benefit of reducing interest rates and high liquidity. On the investment side, yields across various instruments like Fixed deposits, C Ds, T – Bills, Corporate Bonds etc., were on downward trend.

Managing liquidity in such stringent scenarios have been one of the major concerns that financial institutions have been facing. It is imperative for Corporations to keep a check on their future liquidity requirements so that actual measures can be taken at the time of stressful situations like COVID19.

To solve such scenarios and to unlock the liquidity in the system, business houses need to track large expected inflows / outflows and assess the risk and implications of delays or non-receipt as a result of potential issues for the third party.

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Some of the salient points, worth considering :

1.     Managing Working Capital Levels: Working Capital management is a major component of liquidity projection. It is utmost important to track the trends of inflow and outflows and advise the management on the forthcoming stressful scenarios to make and implement the procedures accordingly. 

2.     Alternate sources of fund raising: Institutions should consider alternate and multiple funding sources to shore up capital during the crisis situations. There are tons of sources to maintain liquidity by utilising the global funding channels. These channels can be explored as some of them offer inexpensive sources of funding than the usual network.

3.     Group wide cash visibility: Large Group Companies with several subsidiaries should utilize the collective power and liquidity capability of each of its subsidiaries to provide liquidity injections to cash-starved entities on a short-term basis.

4.     Renegotiation and development of capex & opex: Companies have varied expenses in terms of rent, raw materials, salaries and their day to day expenses which are categories under capex (long term expenses) and opex (short term expenses). These expenses should be managed, monitored and tailored as per the plan defined for the crisis situation. 

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Most NBFCs are following a cautious perspective towards fresh disbursements and are slowly opening up with stringent underwriting norms. Keeping in check with all the scenarios and remedy measures, it is expected that we can have a better control on liquidity, which has a deep impact due to COVID19.

Views expressed in the article are the personal Amit Gupta, Deputy Chief Financial Officer, Arka Fincap Limited.

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