RBI urges corporates to prefer demand loan over cash credit
Published: Jun 18, 2018
By TIOLCORPLAWS News Service
NEW DELHI, JUNE 18, 2018: In the wake of questionable credit discipline shown by Indian corporate borrowers, the RBI is leaving no stone unturned to instil some discipline through the banks it regulates.
The latest proposal by the central bank through a draft guideline is to make all borrowers enjoying working capital limit in excess of Rs 150 cr to compulsorily borrow through the demand loan route for at least 40% of the limit before touching other modes like cash credit, overdraft and bill discounting.
Cash credit is the most popular method of accessing working capital funds from a bank. When a company is assigned a cash credit limit for a year, it could withdraw as much as it wants for as long as it wants within that limit during that year. Cash credit is like a credit card the company swipes when it needs quick money. It is required to pay only the interest and only on the amount withdrawn.
Cash credit is a key to a company's daily functioning and is used to meet a variety of needs from salary payments to supplier transactions. The fact that utilization of cash credit limits is over 68% shows its popularity. The share of cash credit in overall working capital loans has been over 40% historically. Given that it is a revolving credit, big companies accessing working capital limits from multiple banks tend to borrow from one to pay another. At times, it is just rolled over since only interest is paid. The central bank believes the method was getting abused and indeed, in cases of fraud the funds involved were typically short-term working capital loans.