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.

- Dhirendra Kumar

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 Rs. 150.00 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