June 19: The Reserve Bank of India has issued a draft guideline to the lenders, directing them to make corporate lending a more disciplined affair. According to the proposal, all borrowers with working capital limit in excess of Rs150 crore should compulsorily borrow through the demand loan route for at least 40% of the limit.
Other modes like cash credit, overdraft, bill discounting etc. should only be embraced after the aforesaid loan route is taken. Currently, cash credit remains the most popular method of accessing working capital funds from banks with no limit imposed over the credit amount. Additionally, companies are only required to pay the interest on the amount withdrawn, which also helps the credit to be rolled over at times.
RBI is of the view that the method is being abused, as a result of which the new proposal has been put forward to limit the access to cash credit. The necessity to meet working capital needs through demand loans will also help banks predict its outflow.
With the move, borrowers would be required to manage their working capital cycle and short-term liquidity, which would pave way for a better liquidity planning among the borrowers. Additionally, it would also help in improved short-term liquidity by banks that would in turn help them meet regulatory prescriptions and ALM planning. In its report, state-run SBI has said that the withdrawals under working capital demand loans facility for specified durations would also lead to development of term money market in the country.
On an average, the share of cash credit in overall working capital loans has been over 40%, while that of demand loans is about 25%.