What is the difference between FITL and WCTL?

 (The following post explains the difference between Funded Interest Term Loan (FITL) and  Working Capital Term Loan (WCTL)

What is FITL?

Funded Interest Term Loan in a short form known as FITL. When the manufacturing units face severe financial crises, not able to meet their loan obligations, banks extend the FITL facility to such units by way of a rehabilitation package if such units are considered potentially viable. This type of loan is given by the lenders to the borrower for repaying the interest component of the existing loan.  However, before taking a decision to extend this type of additional loan lending institutions need to be convinced that (i) the borrower did not divert the earlier loans and (ii) he is unable to repay even the interest component.  In the FITL scheme of loan, banks usually offer a moratorium (maximum two years) to repay the FITL loan to improve or restore the liquidity of the unit so that it can continue its operations. Further, this type of loan is usually a part of the deep restructuring, which involves longer-than-usual repayment terms that would offer respite to the borrower to liquidate the loan. Correspondingly, by extending FITL the bank and financial institutions may be able to save the account from turning into an NPA. The rate of interest on FITL may be the same as applicable to normal term loans.

RBI allows banks to offer FITL to borrowers under a debt recast scheme. The upgrade or downgrade of a restructured loan will be applicable to FITL as well. As per RBI master circular, Prudential Norms for Conversion of Unpaid Interest into ‘Funded Interest Term Loan’ (FITL), Debt or Equity Instruments, the FITL / debt or equity instrument created by conversion of unpaid interest will be classified in the same asset classification category in which the restructured advance has been classified. Further movement in the asset classification of FITL / debt or equity instruments would also be determined based on the subsequent asset classification of the restructured advance.

What is Working Capital Term Loan (WCTL)?

Working capital, as the name indicates, is the operating capital of a business which is used in its day-to-day operations. The formula for working capital is calculated as the current assets minus the current liabilities. The positive working capital commonly indicates that a company is able to pay off its short-term liabilities almost immediately.  The Cash Credit/ Overdraft against inventories and book debts, Demand Loan portion under Loan System for Delivery of Bank Credit (if permissible working capital finance is above Rs.10 Crore), Packing Credit against inventories, Bills purchased /Discounted (inland & foreign), Cash Credit against book debts/Cheque purchase, Working capital term loan (for excess borrowing) are the types of loans and advances which are considered as working capital finance.

An enterprise starts feeling the cash crunch when it is making losses or faces current asset-liability mismatch. The current asset-liability mismatch arises when working capital funds are used to capital expenditure (CAPEX) or major expansion plans. When a company uses short term sources to long term use, it will be reflected in the distortion of short term financial parameters like Current Ratio less than 1.0, negative net working capital, and maximum permissible bank finance (MPBF) less than working capital limits already enjoyed, etc.  Business enterprises also face cash crunch due to irregular cash flow (when the realization of receivables get slow), due to a longer period of stock turnover (usually when production activities take place during the off-seasons to supply fulfill the demands during the peak season), lack of cash reserves to meet some urgent commitments, or taking up a new opportunity which requires immediate availability of funds to click the deal.

As said earlier, a working capital term loan is accorded as long-term working capital credit facilities to entrepreneurs to correct asset-liability mismatch (of course which is a wrong practice and not treated kindly by banks), or to manage glitches in business cash flows, or to support the extra working capital requirements on the incremental business opportunity. The need-based working capital term loan assistance provided by the lenders only to units considered as potentially viable by them. Banks may assess and provide working capital term loans, according to their lending norms. The irregular portion of cash credit i.e. core irregularity other than unrealised interest* may also be converted into WCTL.  Under rehabilitation programs of RBI, Banks and Financial Institutions also offer a relief /concession to potentially sick MSME Units and extend WCTL in order to manage the shortfall in their working capital requirements.

(*where banks normally extend the FITL in deserving cases)