RBI revises norms on working capital loans to large borrowers
12 June 2018
The Reserve Bank of India (RBI) on Monday released draft guidelines on delivery of working capital loans to large corporates, in a way to bring credit disciple among both borrowers and lenders.
The new guidelines for delivery of bank credit stipulate 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.
In respect of borrowers having aggregate fund based working capital limit of Rs150 crore and above from the banking system, RBI has prescribed a minimum level of ‘loan component’ of 40 per cent effective 1 October 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.
For such borrowers, drawings up to 40 per cent of the total fund based working capital limits should only be allowed from the ‘loan component’. Drawings in excess of the minimum ‘loan component’ may be allowed in the form of cash credit facility, as per the new guidelines.
RBI has asked the lenders to lay down ground rules for sharing of cash credit and loan components in cases where they act as a consortium. All lenders in the consortium will individually and severally be responsible to make sure that at the aggregate level, the ‘loan component’ meets the guidelines. Under multiple banking arrangements (MBAs), each bank should ensure adherence to these guidelines at individual bank level, RBI said.
Banks should fix the amount and tenor of the working capital demand loan (WCDL) 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.
Banks, including consortia or syndicates, will have the discretion to stipulate repayment of the ‘loan component’ in instalments or by way of a "bullet" repayment, subject to IRAC norms, RBI said.
Effective 1 April 2019, the undrawn portion of cash credit/ overdraft limits sanctioned to large borrowers, irrespective of whether unconditionally cancellable or not, should attract a credit conversion factor of 20 per cent.
RBI said the 40 per cent loan component will be revised to 60 per cent, with effect from 1 April 2019.
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 is by far the most popular mode of working capital financing. While cash credit has its benefits, it is the cash component that leads to perpetual roll-overs.
This also poses several regulatory challenges such as transmission of liquidity management from the borrowers to banks/RBI, hampering of smooth transmission of monetary policy, etc, says the RBI release.