Reserve Bank of India (RBI) signage is displayed at the entrance to the bank’s headquarters in Mumbai (Photographer: Kuni Takahashi/Bloomberg)

RBI’s Draft Norms On Working Capital Loans To Bring Better Credit Discipline: SBI Research

The Reserve Bank of India’s recent draft guidelines on improving credit delivery system for Indian companies will lead to better credit discipline, according to a report by State Bank of India’s economic research team.

The draft guidelines will allow better liquidity planning by borrowers seeking working capital credit, as they would be required to manage their working capital cycle and short-term liquidity, the report said. The guidelines will also lead to improved management of intraday and short-term liquidity by banks, enabling them to meet regulatory prescriptions and better asset-liability planning, SBI Research said.

“Lastly, drawals by borrowers under working capital demand loans facility for specified durations would lead to development of the term money market in India,” the report added.

Also Read: RBI Releases Draft Norms To Modify Loan System For Large Borrowers

On June 11, the RBI released draft guidelines on loan system for delivery of bank credit. The guidelines pointed at fixing the working capital loan systems that banks have adopted over the years. According to the draft, banks would be required to ensure that the demand loan part of the working capital facilities contribute at least 40 percent by October 2018 and 60 percent by April 2019.

In its note, SBI Research noted that demand loans contributed Rs 10.5 lakh crore out of the Rs 34 lakh crore working capital credit issued by banks till September 2017. This works out to approximately 30 percent of the outstanding working capital loans. Demand loan is the portion of a credit facility which is expected to be drawn by the borrower, the rest remains as available lines of credit for whenever the company needs it. A borrower is also expected to repay working capital demand loans within a short period of 90-180 days.

Other types of working capital loans include cash credit, overdraft, packing credit, bill discounting, etc.

Earlier, where banks had rights to cancel the undrawn limits unconditionally, they were not required to set aside a portion of the capital for the same, the SBI Research note pointed out. However, in the draft guidelines, RBI proposes risk weights for the undrawn portion of cash credit or overdraft limits sanctioned to large borrowers, irrespective of whether these are unconditionally cancellable or not. That would come into effect in the next financial year and attract a 20 percent credit conversion factor.

BloombergQuint
Stay Updated With Business News News On BloombergQuint