Loan System for Delivery of Bank Credit
Please
refer to paragraph No. 84 of Governor's Statement on Mid-term Review of Monetary
and Credit Policy for the year 2001-02 enclosed to letter No.
MPD.BC.210/07.01.279/2001-02 dated October 22, 2001.
2.
As you are aware, with a view to bringing about an element of discipline
in the utilisation of bank credit by large borrowers and gaining better control
over the flow of credit, RBI had introduced a ' Loan System' for delivery of
bank credit in April 1995. The Loan System has been extended in phases to cover
larger number of borrowers with the percentage of loan component of the working
capital being gradually enhanced. Currently, the Loan System is applicable to
borrowers enjoying working capital credit limits of Rs.10 crore and above from
the banking system, and the minimum level of loan component in respect of such
borrowers has been fixed at 80 per cent.
3.
The 'Loan System" was introduced to minimise the risks of cash and
liquidity management on the part of the banking system, caused by volatile
movements in cash credit component of working capital. In the current
environment of short-term investment opportunities available to both corporate
and banks, RBI has reviewed the guidelines relating to the 'Loan System'.
Accordingly, it has been decided that banks will henceforth have the freedom to
change the composition of working capital by increasing the cash credit
component beyond 20 per cent or to increase the 'Loan component' beyond 80 per
cent as the case may be, for working capital limits of Rs. 10 crore and above,
if they so desire. Banks are expected to appropriately price each of the two
components of working capital finance, taking into account the impact of such
decisions on their cash and liquidity management. The guidelines relating to the
'Loan System', as currently applicable are set out in the Annexure.
4.
Consequently, paragraph 13 B.I.6 of Chapter 13 in the Manual of
Instructions may be replaced with the revised guidelines.
Annexure
Guidelines
on Loan System for Delivery of Bank Credit
1.
Loan Component and Cash Credit Component
(a)
In the case of borrowers enjoying working capital credit limits of Rs.10
crore and above from the banking system, loan component should normally be 80
per cent. Banks, however, have the freedom to change the composition of working
capital by increasing the cash credit component beyond 20 per cent or to
increase the 'Loan Component' beyond 80 per cent as the case may be, if they so
desire. Banks are expected to appropriately price each of the two components of
working capital finance, taking into account the impact of such decisions on
their cash and liquidity management.
(b)
In the case of borrowers enjoying working capital credit limit of less
than Rs.10 crore, banks may persuade them to go in for the `Loan System' by
offering an incentive in the form of lower rate of interest on the loan
component, as compared to the cash credit component. The actual percentage of
`loan component' in these cases may be settled by the bank with its borrower
clients.
(c)
In respect of certain business activities, which are cyclical and
seasonal in nature or have inherent volatility, the strict application of loan
system may create difficulties for the borrowers. Banks may, with the approval
of their respective Boards, identify such business activities, which may be
exempt from the loan system of delivery.
2.
Ad hoc Credit Limit
As
at present, ad hoc/additional credit for meeting temporary requirements can be
considered by the financing bank only after the borrower has fully utilised/exhausted
the existing limit.
3.
Sharing of Working Capital Finance
The
ground rules for sharing of cash credit and loan components may be laid down by
the consortium, wherever formed, subject to guidelines on bifurcation as stated
in paragraph (1) above. The level of individual bank's share shall continue to
be governed by the norm for single borrower/group exposure.
4.
Rate of Interest
Banks
are allowed to prescribe Prime Lending Rates and spreads over Prime
Lending Rates separately for `loan component' and 'cash credit component'.
5.
Period of of Loan
The
minimum period of the loan for working capital purposes may be fixed by banks in
consultation with borrowers. Banks may decide to split the loan component
according to the need of the borrower with different maturity bases for each
segment and allow roll over.
6.
Security
In
regard to security, sharing of charge, documentation, etc., banks may themselves
decide on the requirement, If necessary, in consultation with the other
participant banks.
7.
Export Credit
The
bifurcation of the working capital limit into loan and cash credit components,
as stated in paragraph (1) above, would be effected after excluding the export
credit limits (pre-shipment and post-shipment). Export credit limit would
continue to be allowed in the form hitherto granted.
8.
Bills limit for inland sales may be fully carved out of the `loan'
component�. Bills limit also includes limits for purchase of third party
(outstation) cheques/bank drafts. Banks must satisfy themselves that bills limit
is not misultilised and in this connection, the instructions contained in
Circular DBOD. No. BC.8/16.13.100/92-93 dated July 27, 1992 should be carefully
noted and complied with.
9.
Renewal/ Rollover of Loan Component
The
`loan component' may be renewed/rolled over at the request of the borrower.
10.
Provision for Investing Short-term Surplus Funds of Borrower
The
banks, at their discretion, may permit the borrowers to invest their
short-term/temporary surplus in short-term money market instruments like
Commercial Paper (CP). Certificates of Deposit (CD) and in Term Deposit with
banks, etc.
11.
Applicability
The
loan system would be applicable to borrowal accounts classified as `standard' or
`sub-standard'.
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