Despite the flood of cheap money in overseas markets, the past few months have been rather difficult for cash strapped companies in India. Ones with high levels of debt on their balance sheet have been literally scouting for funds at every nook and corner. The high demand for working capital and short term loans has meant that banks have raised their credit deposit ratio. Typically, out of every Rs 100 of deposits, the bank can lend Rs 73. This is after keeping aside Rs 23 and Rs 4 respectively for SLR (statutory liquidity ratio) and CRR (cash reserve ratio).

However, as per Economic Times, the outstanding credit deposit ratio is currently 78%. Moreover the incremental credit deposit ratio is 83%. This means a substantial part of the lending is from high cost borrowing rather than cheaper CASA (current and savings accounts). Effectively banks themselves will have to frequently re-price their short term lending at higher rates to keep their margins (NIMs) stable. Without that banks will have to compromise on their own profitability and asset quality. All said, the cost of funding for cash strapped companies is set to go higher. And investors would do well to give such companies a miss.