Page 28 - Banking Finance March 2021

ARTICLE

circular. This is likely to affect working capital-intensive
sectors the most. Meanwhile, export-oriented sectors are
likely to remain unaffected by the new guidelines, because
as per RBI, while applying this rule bank should not consider
export credit limit.
After implementation of this circular, Cash management
became more sophisticated, especially if the borrower
belongs to industries such as engineering, procurement, and
construction, which have more volatile cash flow cycles. In
particular, the move may be onerous for borrowers with
weaker cash flows.

Now, after implementation of the new RBI guidelines on the
virtually banks were earning very less interest income loan system for the delivery of bank credit, the burden of
compared to sanction limits or not earning interest on cash management has been shifted to borrowers. The
that limit. But at the same time banks have to provide burden will necessitate borrowers to install systems and
capital for those limits. processes to manage surplus cash and tie up their working
capital loan components (especially rollovers) with banks in
After implementation of this Loan Delivery System a timely manner.
Mechanism, borrowers have to avail minimum 60% as
Working Capital Loan (WCL) before availment of CC Now banks are more judicious in sanctioning working capital
limit, hence the interest income of banks has grown up limits to firms and would most likely provide these facilities
substantially even low or negative growth of loans & at a higher cost as there is a provision of credit conversion
advance portfolio in the book of banks. factor for undrawn limits. Banks will definitely recover that
amount from respective borrowers only and hence interest
2. Probability of increase in potentially stressed burden of borrower is likely to increase due to higher
debt availment level of WC limit.
The implementation of the recent Reserve Bank of India's Conclusion:
(RBI) guidelines on the loan system for the delivery of
bank credit is likely to require a rollover of Rs. 4.10 trillion There is an overall positive impact from the implementation
of the stated guidelines.
worth of working capital loan in FY2020 industry wise.
About Rs. 1.90 trillion worth of debt is likely to face a Some of the impacts are:
high or very high rollover risk owing to weak operating 1. Interest Income of banks is likely to increase due to
cash flows and a high proportion of rollover requirement mandatorily availment of WCDL component before
vis-à-vis debt outstanding at FY2019. availing cash credit limits.
2. It will lead to better intra-day fund management and
The implementation of the new RBI guidelines could put
short-term liquidity in the banking system which will help
at risk Rs. 5.24 trillion worth of debt in FY2019; this could
in achieving better asset liability management (ALM)
result in an increase in potential stress and increase the
non-performing asset for banks in FY2019-2020. 3. This also urges the borrowers towards better liquidity
planning and impacts greater credit discipline.
(Source - India Ratings and Research
www.indiaratings.co.in) 4. With this new guideline, banks will also require to assess
the working capital requirements of a borrower more
Impact of Loan System of delivery on accurately and this will improve the internal monitoring
process of banks.
Large Borrowers:
References
The new RBI guidelines are intended to enhance credit
discipline among the larger borrowers enjoying working Y https://www.rbi.org.in
capital facility from the banking system, said the RBI in its Y News from different newspapers. T

28 | 2021 | MARCH | BANKING FINANCE