RBI seeks to tighten working capital loans

Mandatory CCF on cards for undrawn portion for large borrowers

MUMBAI: The relatively loose working capital finance regime of the bank loan system may be tightened by the Reserve Bank of India (RBI) for large borrowers while keeping the options for further tightening open.

The guidelines on this released by RBI have stipulated 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, with a view to enhancing credit discipline among large borrowers.

Banks provide working capital finance by way of cash credit/overdraft, working capital demand loan, purchase/discount of bills, bank guarantee, letter of credit, factoring, etc. Cash credit (CC) is by far the most popular mode of working capital financing. “While cash credit has its benefits, it also poses several regulatory challenges such as perpetual roll overs, transmission of liquidity management from the borrowers to banks/RBI, hampering of smooth transmission of monetary policy, etc,” the RBI guidelines observed.

In respect of borrowers having aggregate fund based working capital limit of Rs150 crore and above from the banking system, a minimum level of ‘loan component’ of 40 per cent will be effective from October 1, 2018. Accordingly, for such borrowers, the outstanding ‘loan component’ must be equal to at least 40 per cent of the sanctioned fund based working capital limit, including ad hoc credit facilities.

“Hence, for such borrowers, drawings up to 40 per cent 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 guidelines stated.

The guidelines require the banks to note that effective from April 1, 2019, the undrawn portion of cash credit/ overdraft limits sanctioned to the large borrowers, irrespective of whether unconditionally cancellable or not, will attract a credit conversion factor of 20 per cent.

Moreover the 40 per cent loan component will be revised to 60 percent, with effect from April 1, 2019.

 

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