New RBI norms for credit discipline among big borrowers

The Reserve Bank of India (RBI) has proposed stipulating a minimum level of ‘loan component’ in fund-based working capital loans for large borrowers. Under the existing cash credit system, bankers enhance the credit limits for companies annually without looking at the ability of borrowers to repay the loan amount. The fresh  move is likely to promote greater credit discipline among large borrowers enjoying working capital facilities.

The central bank’s draft norms also stipulate a mandatory credit conversion factor (CCF) for the undrawn portion of cash credit/overdraft limits availed of by large borrowers.

“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 per cent shall be effective from October 1, 2018,” said the draft guidelines.

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, it said.
“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 RBI's draft said.

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

“The cash credit facility allows borrower's multiple debits and credits on a daily basis and helps them meet their cash flow gaps within the sanctioned limits. This generally holds true as long as all debits and credits are routed only through this account and so long as the assumptions for the working capital cycle remain unchanged. Under the current system in cash credit which is an overdraw facility, every year the credit limits are increased without banks looking at the borrowers ability to repay. The cash credit system is unique to India while worldwide short term loans are taken for companies to meet their working capital demands,” a senior banker told FC.

Karthik Srinivasan, head financial sector ratings at Icra, said, “As per the proposed norms, for a portion of the loan there will be a fixed repayment schedule which should ensure that these accounts are not misused. So, the borrowers necessarily repay on the due date before redrawing from the overall limits. Now, there will be a fixed repayment pattern for companies enjoying cash credit.”

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

Falaknaaz Syed