RBIs new loan guidelines to bring in discipline among large borrowers, banks; heres how

In order to boost credit growth, the RBI has recently released a draft guidelines for loan system of banks stipulating 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. This move is considered very positive by State Bank of India as it believes it will bring in credit discipline besides bringing in better tomorrow in the banking system. 

Among major changes, RBI stated, for large borrowers having aggregate fund based working capital limit of Rs 150 crore and above from the banking system, including ad hoc credit facilities, drawings up to 40% of the total fund based working capital limits shall only be allowed from the ‘loan component’.

This 40%  loan component will be effective from October 1, 2018 and will be revised to 60%, with effect from April 1, 2019. 

According to SBI, earlier RBI had prescribed that for borrowers enjoying working capital credit limits of Rs 10 crore and above from the banking system, the loan component should normally be 80%. 

It explained that banks, however, had the freedom to change the composition of working capital by increasing the cash credit component beyond 20% or to increase the ‘Loan Component’ beyond 80%, as the case may be, if they so desired. 

Dr Soumya Kanti Ghosh, Group Chief Economic Adviser at SBI, said, “The proposed new norm is a positive for all. Independent estimates suggest that the cash-to-cash cycle for Indian corporates / how long cash is tied up to working capital are comparatively larger as compared to their global counterparts. There are many benefits of this move.”

Earlier banks had rights to cancel the undrawn limits unconditionally, and were not required to set aside a portion of capital for the same. However, in new guidelines, RBI proposes, effective from April 1, 2019, risk weights for the undrawn portion of cash credit/ overdraft limits sanctioned to the aforesaid large borrowers, irrespective of whether unconditionally cancellable or not, with a credit conversion factor of 20% being applicable. 

Credit wise distribution as of September 2017, reveals that around 44% of the credit is for short term working capital i.e. Cash Credit, Overdraft, Demand Loan, packing credits etc. and 56% is in in the form of term loan (9% medium term loan and 47% long term loan). 

From the data, it can be seen that  the overall percentage of demand loan in working capital from table-1, the amount of demand loan is Rs 10.5 lakh crore in overall fund based working capital loan of Rs 34 lakh crore. 

The share works out to be 30%, which RBI wants to be 40% from October 2018 and 60% from April 2019. 

Ghosh talked about the three changes from the RBI’s guidelines. 

Firstly, as the borrowers would be required to manage their working capital cycle and manage short term liquidity, it would lead to better liquidity planning by borrowers. 

Secondly, it will lead to improved management of intraday and short term liquidity by banks, enabling the banks to meet regulatory prescriptions and better ALM planning. 

Lastly, withdrawals by customers under working capital demand loans / WCDL facility for specified durations would lead to development of term money market in India.