In a move aimed at enhancing credit discipline among large borrowers, and preventing perpetual roll-overs, the Reserve Bank of India today released draft guidelines on loan system for delivery of bank credit.

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According to the note released on its website, RBI said the draft norms 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 or overdraft limits availed by large borrowers."

Large borrowers are defined as borrowers having aggregate fund based working capital limit of Rs. 150 crore and above from the banking system.

As per the new draft norms, banks will now be required a minimum of 40% of the total fund based working capital limits as 'loan component', with effect from October, 2018.

The central bank clarified, that drawings up to 40% of total fund based working capital limits would only be allowed from the ‘loan component’, and any drawings in excess of this minimum threshold would be allowed in the form of cash credit.

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.

Further, the draft norms say that the unutilised portion of cash credit/ overdraft limits sanctioned to large borrowers to attract a credit conversion factor or CCF of 20% with effect from April 1, 2019.

CCF or Credit Conversion Factor converts an off balance sheet exposure to its credit exposure equivalent. The 40% loan component will be revised to 60%, with effect from April 1, 2019.

The draft rules further said that ground rules for sharing of cash credit and loan components can be laid down by the consortium of lenders, wherever formed. The amount and tenor of the working capital demand loan can also 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.

Comments on the draft guidelines are invited from banks and other stakeholders by June 26, 2018.

A working capital loan is a credit facility that is used to finance everyday expenses and operations of a company such as payment of wages. They are not used for long-term investments or to buy assets.

Such loans enable companies that have high cyclical or seasonal sales to sustain operations through the year.

First Published:Jun 11, 2018 7:16 PM IST