Executive Summary:
This document outlines guidelines for a loan system for delivering bank credit, aimed at enhancing credit discipline among larger borrowers with working capital facilities. Effective April 1, 2019, a minimum loan component of 40% was required, revised to 60% on July 1, 2019, for borrowers with working capital limits of ₹1500 million and above. It also specifies risk weights for undrawn cash credit portions.
Key Points / Main Content:
Loan Component Requirement:
* For borrowers with aggregate fund-based working capital limits of ₹1500 million and above, a minimum loan component was initially 40%, increased to 60% by July 1, 2019.
* The outstanding Working Capital Loan (WCL) must equal at least the specified percentage of the sanctioned fund-based working capital limit.
* Drawings up to the loan component threshold are allowed from the loan component; excess drawings can be in the form of cash credit.
* Export credit limits and bills limits for inland sales are excluded from the working capital limit before bifurcation.
* Bank investments in borrower's commercial papers, sanctioned as part of working capital, are included in the loan component.
Sharing and Tenor:
* Consortiums should lay down ground rules for sharing cash credit and loan components, adhering to the bifurcation guidelines.
* All lenders in a consortium are jointly responsible for ensuring the loan component meets the requirements.
* Under Multiple Banking Arrangements (MBAs), each bank ensures adherence at the individual bank level.
* The amount and tenor of the loan component are determined by banks in consultation with borrowers, with a minimum tenor of seven days.
* Banks can split the loan component into WCLs with different maturity periods.
Repayment and Risk Weights:
* Banks have discretion to stipulate repayment of WCLs in installments or as a bullet repayment, subject to IRAC norms.
* Banks may consider rolling over WCLs at the borrower's request, subject to IRAC norms.
* Effective April 1, 2019, the undrawn portion of cash credit/overdraft limits for large borrowers attracts a credit conversion factor of 20%.
Implementation:
* The guidelines are effective from April 1, 2019, covering existing and new relationships.
Impact Analysis:
Scheduled Commercial Banks and Small Finance Banks:
* Impact: These institutions are required to implement the new loan system guidelines for eligible borrowers.
* Action Required: Banks must adjust their lending practices to meet the minimum loan component requirements and apply the specified risk weights. They also need to establish internal policies and procedures to ensure compliance.
Large Borrowers (with working capital limits of ₹1500 million and above):
* Impact: Borrowers will experience changes in how their working capital is structured, with a larger portion required as a loan component.
* Action Required: Borrowers need to coordinate with their banks to restructure their working capital facilities and manage their drawings accordingly. They also need to understand the repayment terms and rollover options for the loan component.
Key Entities Referenced
Reserve Bank of India: The central bank of India, referred to here as the source of the policy notification.
All Scheduled Commercial Banks: Refers to the group of banks to which the guidelines are applicable.
Small Finance Banks: Refers to the group of banks to which the guidelines are applicable.
Guidelines on Loan System for Delivery of Bank Credit: The main subject of the policy document, outlining guidelines for loan delivery by banks.
Saurav Sinha: Chief General Manager in-Charge at Reserve Bank of India, signing off on the guidelines.
Working Capital Loan: Loan component of working capital limit to enhance credit discipline among larger borrowers.
Multiple Banking Arrangements: Refers to arrangements where borrowers have credit facilities from multiple banks.
IRAC norms: Income Recognition and Asset Classification norms, used in the context of repayment, renewal, or rollover of Working Capital Loans.
RBI/2018-19/87
DBR.BP.BC.No.12/21.04.048/2018-19
December 5, 2018
All Scheduled Commercial Banks
Small Finance Banks
Dear Sir/ Madam,
Guidelines on Loan System for Delivery of Bank Credit
Please refer to the Draft Guidelines on the captioned subject issued on June 11,
2018 for comments of the stakeholders.
2. Taking into account the views of the stakeholders, the final guidelines are
annexed.
Yours faithfully,
(Saurav Sinha)
Chief General Manager in-ChargeAnnex
Guidelines on Loan System for Delivery of Bank Credit
With a view to enhance credit discipline among the larger borrowers enjoying
working capital facility from the banking system, delivery of bank credit for such
borrowers shall be as under:
1. Minimum level of ‘loan component’ and Effective date
In respect of borrowers having aggregate fund based working capital limit of ₹1500
million and above from the banking system, a minimum level of ‘loan component’ of
40 percent shall be effective from April 1, 2019. Accordingly, for such borrowers, 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. Hence, for such borrowers, drawings up to 40 percent 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. Working examples for bifurcation of working capital
limit are provided in Appendix I. The bifurcation of the working capital limit into loan
and cash credit components shall be effected 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.
2. Sharing of Working Capital Finance
The ground rules for sharing of cash credit and loan components may be laid down
by the consortium, wherever formed, subject to guidelines on bifurcation as stated in
paragraph 1 above. All lenders in the consortium shall be individually and jointly
responsible to make sure that at the aggregate level, the ‘loan component’ meets the
above mentioned requirements. Under Multiple Banking Arrangements (MBAs), each
bank shall ensure adherence to these guidelines at individual bank level.
3. Amount and tenor of the loan
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 maydecide to split the loan component into WCLs with different maturity periods as per
the needs of the borrowers.
4. Repayment/Renewal/Rollover of Loan Component
Banks/consortia/syndicates will have the discretion to stipulate repayment of the
WCLs in instalments or by way of a "bullet" repayment, subject to IRAC norms.
Banks may consider rollover of the WCLs at the request of the borrower, subject to
compliance with the extant IRAC norms.
5. 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.
6. The guidelines will be effective from April 1, 2019 covering both existing as well as
new relationships. The 40 percent loan component will be revised to 60 percent, with
effect from July 1, 2019.Appendix I
Working Example for Bifurcation of Working Capital Limits
(After adjustment as at paragraph 1 of the circular)
(₹ in mn)
Sanctioned
S. No. Current 40% of column 2
Aggregate Fund
Outstanding is to be drawn as WCL
based Working
Capital Limit
(1) (3) (4)
(2)
WCL - ₹780
Scenario 1 ₹2100 ₹780
CC - Nil
WCL - ₹840
Scenario 2 ₹2100 ₹1700
CC - ₹860
WCL - ₹840
Scenario 3 ₹2100 ₹1600
CC - ₹760
WCL - ₹840
Scenario 4 ₹2100 ₹2000
CC - ₹1160
WCL - ₹840
Scenario 5 ₹2100 ₹2050
CC - ₹1210