A finance company funds three-year loans partly with three-month commercial paper. The market freezes just as a large tranche matures. Size the funding gap and rank the options.

This month's hole is Rs 200 crore; over the quarter it is closer to Rs 700 crore. Cash and lines cover Rs 800 crore of the Rs 1,000 crore maturing, but they can be used only once, while Rs 500 crore more falls due in each of the next two months. Stop new lending so collections of about Rs 167 crore a month flow back, draw the committed lines, then sell loan pools. The root problem was funding long loans with paper that has to be rolled every quarter.

Picture someone who buys a house with a loan that must be renewed every three months. As long as the bank renews, all is well. The one quarter it does not, the house cannot be sold fast enough to repay. Ushmavan's loans are good, but they pay back over three years while a third of the funding must be refinanced every month. In a market freeze the question is not whether the assets are sound but whether cash arrives before the paper falls due. Rates barely matter: the paper cannot be rolled at any price.

Cash and lines are used once. After this month Ushmavan has no buffer left, and another Rs 500 crore falls due in each of the next two months. If it stops new lending, its borrowers keep repaying: Rs 6,000 crore amortising over 36 months returns about Rs 167 crore of principal a month, taking this month's hole down to about Rs 33 crore. The next two months then leave about Rs 333 crore uncovered each, so the quarter needs about Rs 700 crore from somewhere else. Treat the monthly collections as a simplification: some borrowers prepay, some pay late, and a lender that stops lending may see good customers leave.

Rank by speed, certainty and cost. First, stop new disbursements: it is immediate and costs nothing in cash, though it costs franchise. Second, draw the committed bank lines now, before a bank finds a reason to question them; uncommitted linesCredit lines the bank may decline to fund at any time. They look like liquidity in good times and disappear in a crisis. should be counted at zero. Third, sell pools of performing loans to banks, outright or through a securitisation. At an illustrative 5% discount, raising Rs 200 crore means selling about Rs 211 crore of loans for a cost of about Rs 11 crore, which is cheap next to a missed payment. Last, ask the promoter or parent for equity or a loan; it is slow and signals distress.

A maturity ladder: cash due out and cash due in, bucket by bucket. In the one-month bucket Ushmavan owed Rs 1,000 crore and expected about Rs 167 crore in, a negative gap of about Rs 833 crore against Rs 800 crore of cash and lines. That is the number a limit should have capped. Add a stress test that assumes no paper rolls for three months, a cap on short-term paper as a share of borrowings, and committed lines sized to the largest month of maturities. Regulators set their own gap tolerances for finance companies; confirm the current limits before quoting them.