Reserve Bank of India issues draft guidelines on loan system for bank credit

Reserve Bank of India issues draft guidelines on loan system for bank credit
Reserve Bank of India issues draft guidelines on loan system for bank credit

Mumbai : In a move to enhance credit discipline among larger borrowers, the RBI on Monday proposed a "minimum level of loan component" of 40 per cent for borrowers having an aggregate fund-based working capital limit of Rs 150 crore and above from the banking system, a condition proposed to be effective from October 1, 2018.

Issuing the draft guidelines on the loan system for bank credit, the Reserve Bank of India (RBI) also said that the undrawn portion of cash credit and overdraft limits sanctioned to larger borrowers will attract a credit conversion factor of 20 per cent, effective from April 1, 2019.

The central bank said 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," it said.

According to the RBI, cash credit is by far the most popular mode of working capital financing, which 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".

"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 per cent," the statement said.

The 40 per cent loan component will be revised to 60 per cent from April 1, 2019, it added. The RBI has invited comments on the draft guidelines from banks and other stakeholders by June 26.