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Proposes at least 40% loan component in credit of ₹150 cr. and above from Oct. 1

The Reserve Bank of India (RBI) has proposed a minimum 40% loan component for working capital funding of ₹150 crore and above to bring in greater credit discipline and improve monetary transmission.

According to draft guidelines, the RBI has proposed that the loan component of 40% will come into effect from October 1 and will be increased to 60% from April 1, 2019.

The loan’s tenure will be minimum seven days.

“Effective from April 1, 2019, the undrawn portion of cash credit/overdraft limits sanctioned to the large borrowers, irrespective of whether unconditionally cancellable or not, shall attract a credit conversion factor of 20%,” the RBI said. This means banks have to set aside capital for undrawn portion of cash credit limits.

Repayment schedule

Currently, working capital is mostly in the form of cash credit for which interest rate is reset once a year. Also, cash credit does not have a tight repayment schedule.

The proposed new norm will address the following issues. First, if there is a loan component then there will be a repayment schedule which will put pressure on borrowers to manage their liquidity. Secondly, since the loan component will have a fixed tenure, the reset clause can be invoked at the end of each tenure period. “While cash credit has its benefits, it 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.,” the RBI added.

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