Earlier this month, Reserve Bank of India had came out with draft guidelines on loan system for delivery of bank credit to improve discipline among larger borrowers enjoying working capital facility from the banking system.
RBI's draft guidelines on loan system for delivery of bank credit will help improve liquidity planning by large borrowers and intra-day fund management by lenders, a SBI study said on Monday.
Earlier this month, Reserve Bank of India had came out with draft guidelines on loan system for delivery of bank credit to improve discipline among larger borrowers enjoying working capital facility from the banking system. The draft stipulates a minimum level of 'loan component' in fund based working capital finance and a mandatory Credit Conversion Factor (CCF) for the undrawn portion of cash credit/ overdraft limits availed by large borrowers.
"The proposed new norm is a positive for all," said SBI in its research report 'Ecowrap'. Independent estimates suggest that the cash-to-cash cycle for Indian corporates as also how long cash is tied up to working capital are comparatively larger as compared to their global counterparts, it said.
There are many benefits of this move, the report said, adding that as the borrowers would be required to manage their working capital cycle and manage short term liquidity, "it would lead to better liquidity planning by borrowers".
Also, it will lead to improved management of intra-day and short term liquidity by Banks, enabling the Banks to meet regulatory prescriptions and better Asset Liability Management (ALM) planning.
Another benefit, according to the report is that drawals by customers under Working Capital Demand Loans for specified durations would lead to development of term money market in India.
The RBI's draft proposes that for borrowers having aggregate fund based working capital limit of Rs 150 crore and above, a minimum level of loan component' of 40 per cent would be effective from October 1, 2018. The loan component would be increased to 60 per cent from April 2019.
Ecowrap said that around 44 per cent of the credit is for short term working capital limits — cash credit, overdraft, demand loan, packing credits, among others and 56 per cent is contributed by term loan.