Skip to main content

Working capital loans to now come with withdrawal commitment & fees

 Working capital loans to now come with withdrawal commitment & fees 
The Reserve Bank of India on Thursday tightened norms for firms seeking working capital loans by ordering them to pay a fee and commit on withdrawal of sanctioned funds in an attempt to shore up bank treasuries to handle surplus funds from now on.
The RBI said large borrowers will have to stipulate a minimum level of ‘loan component’ in fundbased working capital finance to promote greater credit discipline among borrowers. RBI said that a draft norm on this will be released soon. 
“The working capital requirements of borrowing entities are met by banks through a cash credit limit which is a revolving facility. The cash credit facility places undue burden on the banks in managing their liquidity requirements. Currently banks do not charge any commitment fee and do not maintain any capital on the undrawn portion of the cash credit because it is classified as an unconditionally cancellable facility,” said RBI deputy governor N S Vishwanathan. 
“We therefore want to control the possible volatility in utilisation of cash credit limits by making it mandatory to have a working capital demand loan portion in the working capital facility,” he added. As of now, once a borrower is sanctioned working capital limit, he can draw the loan amount within the limit anytime within a year. This gives the borrower flexibility and comfort to withdraw funds. Large corporates have working capital limits with several banks but most of these limits are not drawn. 
However, banks are mandated to set aside capital on sanctioned amount of working capital loan. Under the new norm borrowers will have to commit to withdraw a fixed amount of the sanctioned limit. 
“The introduction of a mandatory loan requirement in working capital loans will provide the much-needed credit discipline,” said State Bank of India’s chairman Rajnish Kumar. Banks expect the RBI to fix a limit of minimum drawdown based on the size of the loan and the industry. A minimum limit was introduced in the past, but borrowers did not take to it, said a senior banker. 
However, when mandated to assign capital even on the undrawn limit, banks felt the pinch. To mitigate risk on higher capital requirements, many lenders introduced unconditional cancellability clause in the loan agreement. Lenders say that large borrowers have declined to add this clause in the agreement and banks have made exceptions in some such cases. 

The Economic  Times, New Delhi, 18th June 2018


Popular posts from this blog

SC order on RBI circular: More options for banks to tackle defaulting firms

Lenders also have the option of restructuring the loans Lenders to companies which are under stress could now have three options to deal with them if they default on loans: take a haircut as part of a one-time settlement, restructure the loans for a longer tenure as they did when corporate debt restructuring schemes were allowed, or go to the Insolvency and Bankruptcy Code (IBC) for redress. These changes in the options available to lenders come, according to PE funds and bank lawyers who are involved in the IBC process, in the wake of the Supreme Court on Tuesday setting aside the 12 February RBI circular, which allowed a 180-day window to banks to resolve a company default.But they can still find a resolution. According to a Reserve Bank of India circular, a loan becomes a non-performing asset when banks cannot find a way of recovering their money in 90 days. In short, banks still have a window to resolve the default. Lenders can take a haircut as part of a one -time settlement of du…

April GST collections at new high despite rate rationalisation in December

Goods and services tax (GST) collection touched a record high in April, exceeding Rs 1 trillion for the third time in four months. The mop-up was 10 per cent higher over the previous year. Gross collection for the month was Rs 1.13 trillion, said the finance ministry. Despite the recent rate rationalisation in December, a rise in collection was reported. Of the total collected, the CGST (central GST) contributed Rs 21,163 crore, the SGST (state GST) Rs 28,801 crore, the IGST (integrated GST) Rs 54,733 crore (including Rs 23,289 crore on import) and cess Rs 9,168 crore (including Rs 1,053 crore on import). After settlement of the IGST and the balance IGST in a 50:50 ratio between the Centre and states on a provisional basis, the CGST stood at Rs 47,533 crore and SGST at Rs 50,776 crore. The CGST target in the Union Budget for 2019-20 is Rs 6.1 trillion. “The April collection indicates the tax base is increasing gradually, with GST getting stabilised with measures such as e-way bills and…

Shrinking footprints of foreign banks in India

Shrinking footprints of foreign banks in India Foreign banks are increasingly shrinking their presence in India and are also becoming more conservative than private and public sector counterparts. While many of them have sold some of their businesses in India as part of their global strategy, some are trying to keep their core expertise intact. Others are branching out to newer areas to continue business momentum.For example, HSBC and Barclays Bank in India have got out of the retail business, whereas corporate-focused Standard Chartered Bank is now trying to increase its focus on retail “Building a retail franchise is a huge exercise and takes a long time. You cannot afford to lose it,” said Shashank Joshi, Bank of Tokyo-Mitsubishi UFJ’s India head.According to the Reserve Bank of India (RBI) data, foreign banks’ combined loan book shrunk nearly 10 per cent from Rs 3.78 trillion in fiscal 2015-16 to Rs 3.42 trillion last financial year. The banking industry, which includes foreign banks…