Jagran Josh Logo

RBI releases draft guidelines to modify loan system for large borrowers

Jun 12, 2018 16:55 IST
RBI releases draft guidelines to modify loan system for large borrowers

The Reserve Bank of India (RBI) on June 11, 2018 released the draft guidelines to modify the loan system for delivery of bank credit, making the rules stricter to regulate larger borrowers enjoying working capital facility from the banking system.

The draft specifies 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 availed of by large borrowers.

Note

Banks provide working capital finance by way of cash credit, 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. Though cash credit has its benefits, it poses several regulatory challenges such as rollovers, diffusion of liquidity management from the borrowers to banks, and hindering of smooth transmission of monetary policy.

What is Cash Credit?

The Cash Credit is a type of facility provided by the bank or financial institution in which, a company can withdraw an amount more than what he holds to his credit against the security.

This security can be a tangible asset such as stock in hand, raw materials or some other commodity.

Here are the draft guidelines on loan system for delivery of bank credit:

Minimum level of ‘loan component’

Borrowers having aggregate fund based working capital limit of Rs 150 crore and above from the banking system, need to withdraw a minimum of 40 percent of the limit as loan component and the remaining as cash credit, with effect from October 1, 2018.

Sharing of Working Capital Finance

The ground rules for sharing of cash credit and loan components will be laid down by the consortium, subject to guidelines on bifurcation. Under Multiple Banking Arrangements (MBAs), each bank will have a duty to ensure adherence to these guidelines at individual bank level.

Amount and tenure of the loan

The amount of the Working Capital Demand Loan (WCDL) will be fixed by banks in consultation with the borrowers, and the tenure of this loan shall not be less than seven days.

Repayment/ rollover of loan component


Banks will have the discretion to demand repayment of the ‘loan component’ in instalments or by way of a ‘bullet’ repayment.

Risk weights for undrawn portion of cash credit limits


The undrawn portion of cash credit or the overdraft limits sanctioned to the large borrowers will attract a credit conversion factor of 20 percent with effect from April 1, 2019.

Loan component will be revised to 60 percent from 2019

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

Significance

The draft guidelines will help in imparting greater credit discipline in borrowers, who will now need to manage their working capital flows in a more planned manner to avoid defaults.

The new guidelines, if implemented, will force lenders to assess the working capital requirement of borrowers more accurately.

 

Video: Check out the latest current affairs of this week

Is this article important for exams ? Yes1 Person Agreed

Latest Videos

Register to get FREE updates

    All Fields Mandatory
  • (Ex:9123456789)
  • Please Select Your Interest
  • Please specify

  • ajax-loader
  • A verifcation code has been sent to
    your mobile number

    Please enter the verification code below

Newsletter Signup
Follow us on
This website uses cookie or similar technologies, to enhance your browsing experience and provide personalised recommendations. By continuing to use our website, you agree to our Privacy Policy and Cookie Policy. OK