What are Latest guidelines on Loan System for Delivery of Bank Credit?

The draft on guidelines on Loan System for Delivery of Bank Credit released by RBI on December 6, 2018 states that the new guidelines on ‘Loan System for Delivery of Bank Credit’ for borrowers having aggregate fund-based working capital limit of ₹1500 million and above from the banking system will be effective from April 1, 2019. The above guidance is applicable to both existing as well as new relationships. The present 40 percent loan component will be revised to 60 percent, with effect from July 1, 2019. At present, the outstanding ‘loan component’ (Working Capital Loan) must be equal to at least 40 percent of the sanctioned fund-based working capital limit, including ad hoc limits and TODs.

The bifurcation of the working capital limit into loan and cash credit components shall be operative after excluding the export credit limits (pre-shipment and post-shipment) and bills limit for inland sales from the working capital limit. Investment by the bank in the commercial papers issued by the borrower shall form part of the loan component, provided the investment is sanctioned as part of the working capital limit.

In terms of the above guidelines, drawings in excess of the minimum ‘loan component’ threshold may only be allowed in the form of cash credit facility. Therefore, for such borrowers, drawings up to 40 percent of the total fund-based working capital limits shall only be allowed to draw from the ‘loan component’. The amount and tenor of the loan component 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 into WCLs with different maturity periods as per the needs of the borrowers.  Banks/consortia/syndicates at their discretion may stipulate repayment of the WCLs in installments or by way of a “bullet” repayment, subject to IRAC (Income Recognition and Asset Classification) norms.  Banks may also consider rollover of the WCLs at the request of the borrower, subject to compliance with the extant IRAC norms.

In case of consortium advances, all members of consortium lenders shall be individually and jointly responsible to ensure that the ‘loan component’ meets the above-mentioned requirements of 40% loan (working capital) to Cash Credit limit of 60%o and under Multiple Banking Arrangements (MBAs), each bank shall ensure adherence to these guidelines at individual bank level. However, from July 1, 2019, the proportion working capital loan component will be 60% to a Cash credit limit of 40%.

Illustration of Bifurcation of Working Capital Limits to be drawn as working capital loan (WCL)

(Amount in Million Rupees)

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 percent.