Reserve Bank of India releases draft norms to modify loan system in order to bring discipline among large borrowers

The Reserve Bank on Monday came out with draft guidelines on loan system for delivery of bank credit to improve discipline among larger borrowers

Press Trust of India June 12, 2018 11:41:15 IST
Reserve Bank of India releases draft norms to modify loan system in order to bring discipline among large borrowers

Mumbai: The Reserve Bank on Monday came out with draft guidelines on loan system for delivery of bank credit to improve discipline among larger borrowers enjoying working capital facility from the banking system.

The draft stipulates a minimum level of 'loan component' in fund based working capital finance and a mandatory Credit Conversion Factor (CCF) for the undrawn portion of cash credit/ overdraft limits availed by large borrowers, it said.

"In respect of borrowers having aggregate fund based working capital limit of Rs 150 crore and above from the banking system, a minimum level of ‘loan component' of 40 percent shall be effective from 1 October, 2018," said the draft guidelines as RBI proposes to modify the system for delivery of bank credit for large borrowers.

Accordingly, for such borrowers, the outstanding ‘loan component' must be equal to at least 40 percent of the sanctioned fund based working capital limit, including ad hoc credit facilities, it said.

"Hence, for such borrowers, drawings up to 40 percent of the total fund based working capital limits shall only be allowed from the ‘loan component'. Drawings in excess of the minimum ‘loan component' threshold may be allowed in the form of cash credit facility," the RBI's draft said.

Reserve Bank of India releases draft norms to modify loan system in order to bring discipline among large borrowers

Representational image. Reuters

The 40 percent loan component will be revised to 60 percent, with effect from 1 April, 2019, it added.

The central bank has invited comments on the draft guidelines from banks and other stakeholders by 26 June.

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.

On sharing of working capital finance, the draft said that the ground rules for sharing of cash credit and loan components may be laid down by the consortium, wherever formed.

It further said that the amount and tenor of the working capital demand loan (WCDL) may be fixed by banks in consultation with the borrowers, subject to the tenor being not less than seven days.

Banks may decide to split the loan component with different maturity periods as per the need of the borrowers, it added.

Also, from 1 April, 2019, the undrawn portion of cash credit/ overdraft limits sanctioned to the aforesaid large borrowers, irrespective of whether unconditionally cancellable or not, will attract a credit conversion factor of 20 percent, the draft guidelines said.

Updated Date:

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