In a bid to instill credit discipline among big borrowers, the RBI has come up with draft guidelines on Monday as per which the central bank proposes to restrict the amount of short-term cash big firms can raise against receivables and stocks.
The RBI's draft said, "In respect of borrowers having aggregate fund based working capital limit of ₹150 crore and above from the banking system, a minimum level of 'loan component' of 40% shall be effective from 1 October 2018," the guidelines said. "The 40% loan component will be revised to 60%, with effect from 1 April 2019."
This means borrowers having working capital arrangement of Rs. 150 crore and above from banking institutions will need to withdraw minimum 40% as loan component from the total limit and rest as cash credit.
At the same time, the apex bank proposes to fix the tenure of such loans at over 7 days. Also, against the unused cash credit portion, the RBI is mulling over the proposal that banks set aside more capital.
Though cash credit is the most popular form of working capital financing for large borrowers, it comes with its own set of demerits that include transfer of liquidity management from borrowers to RBI or bankers, blocks the smooth transmission of monetary policy and perpetual rollovers.
The new norms are believed to build credit discipline among large borrowers and also push them into raising funds from the money market. Also, in case the draft guidelines by the RBI are implemented, bankers will be compelled to assess the working capital needs of the corporate more precisely.