The Reserve Bank of India released draft guidelines to modify the loan system for large borrowers to enhance credit discipline among them.
Under the new guidelines, the Indian regulator will implement a minimum level of loan component of 40% for borrowers having an aggregate fund-based working capital limit of 1.5 billion rupees and above from the banking system. For such borrowers, drawings of up to 40% of the total fund-based working capital limits will only be allowed from the loan component. Drawings in excess of the minimum loan component threshold may be allowed in the form of a cash credit facility.
The new minimum level will take effect Oct. 1. The 40% loan component will be revised to 60%, effective April 1, 2019.
The central bank said the new norms address the regulatory challenges with regard to cash credit, the most popular mode of working capital financing provided by banks. Cash credit poses regulatory challenges including perpetual rollovers, transmission of liquidity management from the borrowers to banks and hindering smooth transmission of monetary policy.
The RBI is also implementing a risk weight for the undrawn portion of cash credit limits. Starting April 1, 2019, the undrawn portion of cash credit for large borrowers will not attract a credit conversion factor of 20%.
