Cash Flow based Lending

• Working Capital is a financial metric which represents operating liquidity available to a business.
• The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.
• Banks provide working capital finance by way of cash credit/overdraft, working capital demand loan, purchase/discount of bills, bank guarantee, letter of credit and factoring.
• Cash credit (CC) is by far the most popular mode of working capital financing. 
• RBI used to advise the banks on how to access the working capital requirements of the borrowers. 
• However, with the liberalization process already set-in, RBI has given freedom and allowed the banks to come out with their own methods of working capital lending as long as it is correctly and efficiently addressing the working capital requirements of the borrowers.
• In this, the latest addition to the method of working capital finance is ‘’Cash Flow based Lending’’ (CLBL) method. 
• Small businesses are comfortable in switching over from the traditional type of lending to CLBL method. Cash flow lending systems not only support small-scale entrepreneurs but also those in seasonal occupations.
• The recent years have noted the growing consumer preference is in the favour of cash flow-based loans. Small businesses, especially, are turning away from conventional financial institutions and switching to such lending options. 
• New-age businesses also find comfort in these lenders as they focus on their future cash projections based on reliable documents to support the cash flows, rather than their current investments. Moreover, such companies need instant loans to support their cash flow needs, and these lenders meet their demands as early as possible; instead of weeks or months.
• Under the purview of cash-flow lending, a financial institution issues the loan after considering the past and future cash flows of the borrower. 
• In this form of lending, the credit rating of the organisation plays a crucial role at the time of approval. Lenders even evaluate the value of the enterprise before granting the loan. 
• The most striking feature of this method is that it requires no collateral. Hence, recipients can get access to instant financing. Such loans are best suited for both young start-ups and SMEs that maintain high margins on their balance sheet or don’t have enough hard assets to offer as collateral.
• The flexibility brought by cash flow lending systems not only supports the needs of small-scale entrepreneurs but also benefits those who engage in seasonal occupations, like fishing, horticulture etc. 
• As compared to the conventional monthly EMIs charged by banks, the cash flow system provides financial institutions with the freedom to customise loans in a manner that these individuals and businesses only pay the interest during the months their business is functioning. In the offseason, they are exempted from such payments.
• RBI Initiatives: The Reserve Bank of India has shown immense support towards this new mode of cash flow based lending systems. It has brought in several regulations and guidelines to boost the credit availing capacity of business owners across industries. For instance, it has focused on the promotion of credit bureaus and proposed a Public Credit Registry (PCR) framework to improve both cash flow and the credit culture in the country. 
• In an effort to encourage digital cash flow lending, it has also launched projects to make at least one district of a state or union territory 100% digitally-abled by the end of March 2021. 42 districts are an active part of this initiative. It aims to address the demand side constraints by providing customer protection along with sustainable credit as well as investment products.
• Availability of credit and cost of credit need to be based more on cash flow-based lending, instead of collateral security, for improving the credit to Gross Domestic Product (GDP) ratio. The various credit bureaus and the proposed Public Credit Registry (PCR) framework will play a pivotal role in bettering the credit flow across the nation as well as will transform the entire lending atmosphere in India.
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