Banking Article, Banking Finance 2021, Banking Finance March 2021

System of Loan Delivery of Bank Credit and its Impact

Introduction:

 

Cash Credit Limit is the most popular form of working capital and functions like an overdraft account. A firm which held a certain cash credit limit with a bank would withdraw money from that account whenever they required and repay it back whenever they have received the sale proceeds and pay the interest as per agreed rate of interest.

It is true that having this type of credit facility is very useful for firms, but it created some volatility in liquidity management for banks. Many big firms often enjoy substantial cash credit limits but hardly use them, due to this reason banks are not earning any income from that un-utilised limit and at the same time banks are unable to meet the credit requirement of other firms because of lack of liquidity.

Hence with a view to enhance credit discipline in the utilization of bank credit among the large borrowers and gaining better control over the flow of credit, Reserve Bank of India came out with guidelines on loan delivery system mechanism in 2018.

The guidelines are applicable in respect of borrowers having Aggregate Fund Based Working Capital (FBWC) limit of Rs. 150.00 crore and above from the banking system excluding the export credit limits (pre-shipment and post-shipment) and bills limit for inland sales under the working capital limit.

Identification of such borrowers is being done based on declaration/submission of documents by the borrower of the aggregate existing limit of Rs150.00 crore and above and also based on CRILC/CIC information/sharing of information in consortium & multiple banking etc.

Accordingly, if any borrower availing fund based working capital limit of Rs 150.00 crore and above from the banking system, a minimum level of ‘loan component’ of 60 percent shall be allowed from the ‘loan component’. Drawings in excess of the minimum ‘loan component’ threshold may be allowed in the form of cash credit facility.

 

Background

 

In order to bring about an element of discipline in the utilisation of bank credit, as per the recommendation of Jilani Committee, “loan system” for delivery of bank credit was first introduced in April 1995 in respect of borrowers with assessed maximum permissible bank finance (MPBF) of Rs 20.00 crore (rupees twenty crore) and above from the banking system.

Under the new dispensation the “cash credit component” was to be restricted to 75 per cent of MPBF and the balance was to be sanctioned as “Loan Component”. The “cash credit component” was further reduced to a maximum of 60 per cent of MPBF in September, 1995. In April, 1996, further changes in the system were introduced with ‘cash credit component’ being reduced to just 40 per cent of assessed MPBF.

“Loan System” for delivery of bank credit was also made applicable to borrowers with assessed MPBF of Rs. 10 crore and above. While announcing the credit policy for the busy season in Oct. 1996, the percentage of “cash credit component” had been increased once again to 75 per cent and certain important changes were also brought in the scheme. In the course of time, however, the ‘cash credit component’ was reduced gradually.

Further changes have been brought out in this scheme while announcing the credit policies from time to time. RBI again revised the guidelines during Oct 2001. Accordingly the loan system for Delivery of Bank Credit was made applicable for borrowers enjoying credit limits of Rs. 10.00 crore and above from banking system, but those guidelines were not mandatory, so despite having the guidelines on loan system for delivery of bank credit RBI was not able to inculcate the discipline in the utilisation of bank credit among borrowers.

Hence moving forward on 5th December 2018, RBI come up with new guidelines of Loan system for Delivery of Bank Credit

 

RBI notification on Loan system for Delivery of Bank Credit dated 5th December 2018:

 

With a view to enhance credit discipline among the large borrowers enjoying working capital from the banking system, delivery of bank credit for such borrower shall be as per RBI notification on Loan system for Delivery of Bank Credit issued vide ref no. RBI/2018-19/87 DBR.BP.BC.No.12/21.04.048/2018-19 dated 5th December 2018. Now the delivery of bank credit for such large borrowers shall be as under:

 

Minimum level of ‘loan component’:

 

The above guidelines are applicable in respect of borrowers having Aggregate Fund Based Working Capital (FBWC) limit of Rs.150.00 crore and above from the banking system excluding the export credit limits (pre-shipment and post-shipment) and bills limit for inland sales from the working capital limit. Identification of such borrowers will be done based on declaration/submission of the borrower of the aggregate existing limit of Rs.150.00 crore and above and also based on CRILC/CIC information/Sharing of information in consortium & multiple banking etc.

 

A minimum level of ‘loan component’ of 40% of FBWC exposure is being maintained in the system (CBS) for identified / eligible accounts with effect from 1st April 2019 and 60% with effect from 1st July 2019 in line with RBI direction. Further, Investment by the banking system in the commercial papers issued by the borrower shall form part of the loan component, provided the investment is sanctioned as part of the working capital limit

 

Accordingly, for such identified borrowers, the ‘loan component’ (Working Capital LoanWCL) must be equal to at least 40 percent of the sanctioned fund based working capital limit, including adhoc limits and TODs. For the purpose of arriving at loan component, the entire outstanding component of TOD and adhoc, initially w.e.f 01.04.2019 if any have been converted into separate WCL. The illustration by RBI is as follows-

(Rs. in crore)

Sr. No. Sanctioned Aggregate Fund based Working Capital Limit Current Outstanding 40% of column 2 is to be drawn as WCL
(1) (2) (3) (4)
Scenario 1 Rs. 2100 Rs. 780 WCL – Rs. 780

CC   – Nil

Scenario 2 Rs. 2100 Rs. 1700 WCL – Rs. 840

CC   – Rs. 860

Scenario 3 Rs. 2100 Rs. 1600 WCL – Rs. 840

CC   – Rs. 760

Scenario 4 Rs. 2100 Rs. 2000 WCL – Rs. 840

CC   – Rs. 1160

Scenario 5 Rs. 2100 Rs. 2050 WCL – Rs. 840

CC   – Rs. 1210

 

Example I – M/s ABC is availing of Rs.500 crore from banking system and from our Bank, the company is availing Rs.200 crore of FBWC limit and the present outstanding is Rs 200.00 crore.The segregation of limit with our Bank will be as under –

(Rs. in crore)

On or before 31.03.2019 On or after 01.04.2019
FBWC Adhoc / TOD in account Total WCL (40%) WCL for Adhoc / TOD CC (60%)
Limit O/s Limit O/s O/s Limit O/s Limit O/s Limit O/s
200 200 0 0 200 80 80 0 0 120 120
On or before 31.03.2019 On or after 01.07.2019
FBWC Adhoc / TOD in account Total WCL (60%) WCL for Adhoc / TOD CC (40%)
Limit O/s Limit O/s O/s Limit O/s Limit O/s Limit O/s
200 200 0 0 200 120 120 0 0 80 80

 

Example II – M/s ABC is availing of Rs.500 crore from banking system and from our Bank, the company is availing Rs.200 crore of FBWC limit and the present outstanding is Rs 160.00 crore. The segregation of limit with our Bank will be as under –

(Rs. in crore)

On or before 31.03.2019 On or after 01.04.2019
FBWC Adhoc / TOD in account Total WCL (40%) WCL for Adhoc / TOD CC (60%)
Limit O/s Limit O/s O/s Limit O/s Limit O/s Limit O/s
200 160 0 0 160 80 80 0 0 120 80

 

On or before 31.03.2019 On or after 01.07.2019
FBWC Adhoc / TOD in account Total WCL (60%) WCL for Adhoc / TOD CC (40%)
Limit O/s Limit O/s O/s Limit O/s Limit O/s Limit O/s
200 160 0 0 160 120 120 0 0 80 40

 

 

Example III – M/s ABC is availing of Rs.500 crore from banking system and from our Bank, the company is availing Rs.200 crore of FBWC limit and the present outstanding is Rs 80.00 crore. The segregation of limit with our Bank will be as under –

 

(Rs. in crore)

On or before 31.03.2019 On or after 01.04.2019
FBWC Adhoc / TOD in account Total WCL (40%) WCL for Adhoc / TOD CC (60%)
Limit O/s Limit O/s O/s Limit O/s Limit O/s Limit O/s
200 80 0 0 80 80 80 0 0 120 0

 

On or before 31.03.2019 On or after 01.07.2019
FBWC Adhoc / TOD in account Total WCL (60%) WCL for Adhoc / TOD CC (40%)
Limit O/s Limit O/s O/s Limit O/s Limit O/s Limit O/s
200 80 0 0 80 120 80 0 0 80 0

 

Example IV – M/s ABC is availing of Rs.500 crore from banking system and from our Bank, the company is availing Rs.200 crore of FBWC limit and the present outstanding is NIL. The segregation of limit with our Bank will be as under –

(Rs. in crore)

On or before 31.03.2019 On or after 01.04.2019
FBWC Adhoc / TOD in account Total WCL (40%) WCL for Adhoc / TOD CC (60%)
Limit O/s Limit O/s O/s Limit O/s Limit O/s Limit O/s
200 0 0 0 0 80 0 0 0 120 0

 

On or before 31.03.2019 On or after 01.07.2019
FBWC Adhoc / TOD in account Total WCL (60%) WCL for Adhoc / TOD CC (40%)
Limit O/s Limit O/s O/s Limit O/s Limit O/s Limit O/s
200 0 0 0 0 120 0 0 0 80 0

 

Example V – M/s ABC is availing of Rs.500 crore from banking system and from our Bank, the company is availing Rs.200 crore of FBWC limit and excess / TOD of Rs.10 crore. The segregation of limit with our Bank will be as under –

(Rs. in crore)

On or before 31.03.2019 On or after 01.04.2019
FBWC WCL (40%) CC (60%)
Limit O/s (incl. excess / TOD) Limit O/s Limit O/s
200 210 80 90* 120 120
*Any credit in the account should first come into WCL.

 

On or before 31.03.2019 On or after 01.07.2019
FBWC WCL (60%) CC (40%)
Limit O/s (incl. excess / TOD) Limit O/s Limit O/s
200 210 120 130* 80 80
*Any credit in the account should first come into WCL.

 

Example VI – M/s ABC is availing of Rs.500 crore from banking system and from our Bank, the company is availing Rs.200 crore of FBWC limit and adhoc of Rs.10 crore. The segregation of limit with our Bank will be as under –

(Rs. in crore)

On or before 31.03.2019 On or after 01.04.2019
FBWC Adhoc in account Total WCL (40%) WCL for Adhoc CC (60%)
Limit O/s Limit O/s O/s Limit O/s Limit O/s Limit O/s
200 200 10 10 210 80 80 10 10 120 120

 

On or before 31.03.2019 On or after 01.07.2019
FBWC Adhoc in account Total WCL (60%) WCL for Adhoc CC (40%)
Limit O/s Limit O/s O/s Limit O/s Limit O/s Limit O/s
200 200 10 10 210 120 120 10 10 80 80

 

Example VII – M/s ABC is availing of Rs.1000 crore from banking system and from our Bank, the company is availing Rs.200 crore of FBWC limit and invocation / devolvement of Non Fund based facilities in our Bank is of Rs.30 cr. The segregation of limit with our Bank will be as under –

(Rs. in crore)

On or before 31.03.2019 On or after 01.04.2019
FBWC Devolvement / invocation Total WCL (40%) WCL for Devolvement / invocation* CC (60%)
Limit O/s Limit O/s O/s Limit O/s Limit O/s Limit O/s
200 200 0 30 230 80 80 0 30 120 120
*Its to be noted that amount under devolvement/invocation will be due for repayment on the day of devolvement/invocation only.

 

 

 

On or before 31.03.2019 On or after 01.07.2019
FBWC Devolvement / invocation Total WCL (60%) WCL for Devolvement / invocation* CC (40%)
Limit O/s Limit O/s O/s Limit O/s Limit O/s Limit O/s
200 200 0 30 230 120 120 0 30 80 80
*Its to be noted that amount under devolvement/invocation will be due for repayment on the day of devolvement/invocation only.

 

Example VIII – M/s ABC is availing of Rs.1000 crore from banking system and from our Bank, the company is availing Rs.200 crore of FBWC limit, having Adhoc of Rs30.00 crs and invocation / devolvement of Non Fund based facilities in  our Bank is of Rs.30 cr. The segregation of limit with our Bank will be as under –

(Rs. in crore)

On or before 31.03.2019 On or after 01.04.2019
FBWC Devolvement / invocation Adhoc Total WCL (40%) WCL for Devolvement / invocation* WCL for Adhoc CC (60%)
Limit O/s Limit O/s Limit O/s O/s Limit O/s Limit O/s Limit O/s Limit O/s
200 200 0 30 30 30 260 80 80 0 30 30 30 120 120
*It is to be noted that amount under devolvement/invocation will be due for repayment on the day of devolvement/invocation only and outstanding will continue in the same account post migration w.e.f. 01.04.2019 till adjustment.

 

 

 

On or before 31.03.2019 On or after 01.07.2019
FBWC Devolvement / invocation Adhoc Total WCL (40%) WCL for Devolvement / invocation*  

WCL for Adhoc

 

CC (60%)
Limit O/s Limit O/s Limit O/s O/s Limit O/s Limit O/s Limit O/s Limit O/s
200 200 0 30 30 30 260 120 120 0 30 30 30 80 80
*It is to be noted that amount under devolvement/invocation will be due for repayment on the day of devolvement/invocation only and outstanding will continue in the same account post migration w.e.f 01.07.2019 till adjustment.

 

Amount and tenor of the loan

 

The amount and tenor of the loan component may be fixed by banks in consultation with the borrowers, subject to the tenor being not less than seven days. Banks may decide to split the loan component into WCLs with different maturity periods as per the needs of the borrowers.

 

Repayment/Renewal/Rollover of Loan Component

 

Banks/consortia/syndicates will have the discretion to stipulate repayment of the WCDLs in installments or by way of a “bullet” repayment, subject to IRAC norms. Banks may consider rollover of the WCLs at the request of the borrower, subject to compliance with the extant IRAC norms.

 

Risk weights for undrawn portion of cash credit limits

 

Effective from April 1, 2019, the undrawn portion of cash credit/ overdraft limits sanctioned to the aforesaid large borrowers, irrespective of whether unconditionally cancellable or not, shall attract a credit conversion factor of 20 percent.

 

Impact of Loan Delivery on Banks:

Under the ‘Loan System for Delivery of Bank Credit’ guideline, in the case of borrowers having an aggregate fund-based working capital limit of Rs 150 crore and above from the banking system, the limit has to be carved out into two components — Working Capital Loan limit or ‘loan component’ (60 per cent of the aggregate limit) and Cash Credit (40 per cent) with effect from July 1, 2019.

The central bank has stipulated that drawings up to 60 per cent of the overall fund-based working capital limits will only be allowed from the ‘loan component’ and drawings in excess of the minimum ‘loan component’ threshold will be allowed in the form of cash credit (CC) facility.

So, borrowers will not only pay interest on the 60 per cent loan component and drawings from CC limit, but may also have to pay commitment charges on the unavailed CC limit.

This system has already started impacting banks, mainly in two ways. These are as under:

  1. Positive impact on net interest income:

Before the implementation of Loan Delivery System Mechanism of RBI the utilisation of limits by borrowers enjoying limits in large exposures (beyond Rs.150 crore) range between 25 to 50 percent. Moreover, quite often the utilisation of limits by very large and high creditworthy customers  remains at near zero levels for the most part of the year with occasional blips when the limit get utilised to the fullest extent.

As the average availment of limits was very low, hence virtually banks were earning very less interest income compared to sanction limits or not earning interest on that limit. But at the same time banks have to provide capital for those limits.

After implementation of this Loan Delivery System Mechanism, borrowers have to avail minimum 60% as Working Capital Loan (WCL) before availment of CC limit, hence the interest income of banks has grown up substantially even low or negative growth of loans & advance portfolio in the book of banks.

  1. Probability of increase in potentially stressed debt

The implementation of the recent Reserve Bank of India’s (RBI) guidelines on the loan system for the delivery of bank credit is likely to require a rollover of Rs 4.10 trillion worth of working capital loan in FY2020 industry wise. About Rs1.90 trillion worth of debt is likely to face a high or very high rollover risk owing to weak operating cash flows and a high proportion of rollover requirement vis-à-vis debt outstanding at FY2019.

The implementation of the new RBI guidelines could put at risk Rs.5.24 trillion worth of debt in FY2019; this could result in an increase in potential stress and increase the non-performing asset for banks in FY2019-2020.

 (Source – India Ratings and Research www.indiaratings.co.in)

Impact of Loan System of delivery on Large Borrowers:

 

The new RBI guidelines are intended to enhance credit discipline among the larger borrowers enjoying working capital facility from the banking system, said the RBI in its circular. This is likely to affect working capital-intensive sectors the most. Meanwhile, export-oriented sectors are likely to remain unaffected by the new guidelines, because as per RBI, while applying this rule bank should not consider export credit limit.

After implementation of this circular, Cash management became more sophisticated, especially if the borrower belongs to industries such as engineering, procurement, and construction, which have more volatile cash flow cycles. In particular, the move may be onerous for borrowers with weaker cash flows.

Now, after implementation of the new RBI guidelines on the loan system for the delivery of bank credit, the burden of cash management has been shifted to borrowers. The burden will necessitate borrowers to install systems and processes to manage surplus cash and tie up their working capital loan components (especially rollovers) with banks in a timely manner.

Now banks are more judicious in sanctioning working capital limits to firms and would most likely provide these facilities at a higher cost as there is a provision of credit conversion factor for undrawn limits. Banks will definitely recover that amount from respective borrowers only and hence interest burden of borrower is likely to increase due to higher availment level of WC limit.

Conclusion:

 

There is an overall positive impact from the implementation of the stated guidelines.

Some of the impacts are:

 

  1. Interest Income of banks is likely to increase due to mandatorily availment of WCDL component before availing cash credit limits.
  2. It will lead to better intra-day fund management and short-term liquidity in the banking system which will help in achieving better asset liability management (ALM)
  3. This also urges the borrowers towards better liquidity planning and impacts greater credit discipline.
  4. With this new guideline, banks will also require to assess the working capital requirements of a borrower more accurately and this will improve the internal monitoring process of banks.

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