Aimed at instilling credit discipline among large borrowers, the Reserve Bank of India (RBI) has proposed to limit the amount of short-term cash a company can borrow from banks against stocks or receivables.
The Central Bank of India, in its latest draft guidelines released on Monday, said that borrowers with working capital facility of over Rs 150 crore need to withdraw a minimum of 40 per cent of the limit as loan component and the remaining as cash credit.
“In respect of borrowers having aggregate fund based working capital limit of Rs 150 crore and above from the banking system, a minimum level of ‘loan component’ of 40 per cent shall be effective from 1O October 2018. The 40 per cent loan component will be revised to 60 per cent, with effect from 1 April 2019,” the guidelines read.
Typically, as a standard norm, working capital facility for a large borrower is given by way of cash credit facility, working capital demand loan and other non-fund based facilities. Among them, cash credit has been the most popular mode of working capital financing.
However, India’s central banking institution, mandated with regulating the monetary policy believes, such an approach, in turn, poses several regulatory challenges such as perpetual rollovers and transmission of liquidity management from the borrowers to banks/RBI, thereby, hampering smooth transmission of monetary policy.