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India Ratings and Research (Ind-Ra) in its latest report has said that unabated macroeconomic shocks may lead to a 28 per cent increase in demand for working capital loan by companies, taking it to Rs 11.2 lakh crore this fiscal (FY23). But, it said this will impact corporates' profitability and cash flows, which may become stagnant or grow at low rate in real terms. It noted that the working capital requirement can rise by 28 per cent to Rs 11.2 lakh crore in FY23, compared to Rs 8.7 lakh crore in FY22, amid the war conditions, considering the significant price run-up in commodities, falling rupee and borrowing costs. The agency had earlier forecast the same to increase up to Rs 9.7 lakh crore in a pre-war condition.

According to the report, a pick-up in credit growth from the industry and services segments on account of the increase in working capital requirements can remain a tailwind for the banking industry in FY23. The Rs 1.5 lakh crore rise in working capital loans on account of macro events will increase the total bank credit book by 1.25 per cent on-year. Though financing conditions are still benign, the rising interest rates will increase borrowing costs. The prevailing uncertain business environment can affect companies with a weak credit profiles and they may face challenges in accessing finance. Entities with weak credit metrics having an interest coverage ratio of below 1.5 times can see a sharp jump in working capital demand to Rs 1.26 lakh crore in a post-war case from Rs 41,000 crore in the pre-war case.

Stating that commodity-intensive sectors will face higher working capital requirements given the massive spike in commodity prices, the agency said the sectors that will have the maximum impact are aviation, capital goods, cement and chemicals.  It said the credit to small businesses have already been on the rise since Covid pandemic on account of higher commodity prices, increase in receivables and a similar increase in creditors. Although most entities work on fixed-margin basis where cost is mostly passed on to large entities, financing for inventory is required.