Mumbai, April 6, 2018

In what could be a possible fallout of the Punjab National Bank (PNB)-Nirav Modi episode, the Reserve Bank of India (RBI) on Thursday said banks would have to advance a certain mandated amount as loan exposure while extending working-capital finance to borrowers.

“With a view to promoting greater credit discipline among working capital borrowers, it is proposed to stipulate a minimum level of ‘loan component’ in fund based working capital finance for larger borrowers,” the central bank said in its statement on Developmental and Regulatory Policies, adding, “Draft guidelines are being issued for feedback in this regard.” At the post-policy press conference, RBI deputy governor NS Vishwanathan said the regulation would also help manage the impact of cash credit limits on banks’ liquidity managment. “The working capital requirements of borrowing entities are met by banks through a cash credit limit, which is a revolving facility,” he said. “The cash credit facility places undue burden on the banks in managing their liquidity requirements, with corresponding repercussions for RBI’s liquidity operations. Currently, banks do not charge any commitment fee and do not maintain any capital on the unknown portion of the cash credit and, thus, it is classified as an unconditionally cancellable facility, which does not have any risk weight under the marking rules.” By making it mandatory to have a loan component associated with all working-capital facilities, it will be easier to control the possible volatility which arises on account of cash credit limits, Vishwanathan said. On March 13, RBI had disallowed banks from issuing letters of undertaking (LoUs) or guarantees for trade credits for imports into India in the aftermath of the `14,000-crore LoU-linked fraud unearthed at PNB. However, letters of credit and bank guarantees for trade credits for imports into the country remain permissible, provided they meet RBI conditions.

[The Financial Express]