5 key changes RBI plans for large borrowers to boost bank credit cycle; all details here
Deposits have come down by -0.3% (-1.6%) for the period March 31 to May 11, while credit has declined by -0.9% (3.2%).
In order to boost credit growth, the Reserve Bank of India (RBI) released draft guidelines for loan system of banks which 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, with a view to enhancing credit discipline among large borrowers. Recently, RBI in its second bi-monthly monetary policy for FY19 already indicated its intention for boosting credit growth. During the first 2 months of any financial year, there is a tendency for both bank deposits and credit to decline. Deposits have come down by -0.3% (-1.6%) for the period March 31 to May 11, while credit has declined by -0.9% (3.2%).
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 CC 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.
Therefore, RBI on June 06 said, “With a view to promoting greater credit discipline among working capital borrowers, it is proposed to stipulate a minimum level of 'loan component' in fund based working capital finance for larger borrowers. Draft Guidelines are being issued for feedback in this regard.”
Here’s a list of six guidelines that RBI unveiled for the banks loan system.
Minimum level of ‘loan component’ and Effective date
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 October 1, 2018.
Accordingly, for such borrowers, the outstanding ‘loan component’ must be equal to at least 40%of the sanctioned fund based working capital limit, including ad hoc credit facilities.
Hence, for such borrowers, drawings up to 40% 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 40% loan component will be revised to 60 percent, with effect from April 1, 2019.
Sharing of Working Capital Finance
All lenders in the consortium shall be individually and severally responsible to make sure that at the aggregate level, the ‘loan component’ meets the mentioned requirements. Under Multiple Banking Arrangements (MBAs), each bank shall ensure adherence to these guidelines at individual bank level.
Amount and tenor of the loan
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.
Repayment/Renewal/Rollover of Loan Component
Banks/consortia/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.
Risk weights for undrawn portion of cash credit limits
Effective from April 1, 2019, the undrawn portion of cash credit/ overdraft limits sanctioned to the aforesaid large borrowers, irrespective of whether unconditionally cancellable or not, shall attract a credit conversion factor of 20%.
For the mentioned guidelines, RBI has invited comments from banks and other stakeholders by June 26, 2018.