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Report: Reserve Bank of India seeks to curb long-term working capital loans

The Reserve Bank of India has directed lenders to stop sanctioningworking capital loans with long-term tenors to stressed companies, India's Mint reported May 3, citing "two bankersin the know."

The central bank's action came after the discovery of severalcases where banks approved working capital loans with tenors as long as 10 yearsin stressed cases.

Working capital loans are typically granted for short periodsto cater to day-to-day cash requirements. By taking longer-term credit as part ofworking capital and not a long-term loan, a stressed account can escape being classifiedas a restructured account.

The central bank had previously told lenders in January thatany additional working capital financing approved under the rectification schemeby a joint lender forum must not exceed a term longer than six to eight months.Offering a term beyond that is tantamount to restructuring of the loan.

While it is common for banks to approve long-term loans as partof working capital as there is a long-term component in the loans, the central bankobjected to clearing such loans for stressed cases where rectification has beeninvoked, said a senior public sector banker.

The RBI did not reply to the publication's email query on thematter.