RBI norms and Bank Margins

BE/RBINOTE/16/2019

The new financial year may see the banks’ margin coming under pressure… Why?

• RBI has laid stringent measures on Corporate Lending.
• This will see India Inc increasingly tapping the bond market for its funding requirements.
• RBI guidelines may push the Banks to increasingly invest in Corporate Bonds from April 1, 2019

Effects on Banks:

• Banks might be compelled to rework their credit growth strategy through an increased participation in the bond market beginning the FY 2020, on account of RBI guidelines pertaining to two areas namely:
  • Loan System for Delivery of Bank Credit and
  • Enhancing Credit Supply for Large Borrowers through Market Mechanism
• Under the ‘Loan System for Delivery of Bank Credit’ guideline, w.e.f 1^st April 2019, in the case of borrowers having an aggregate fund based working capital limit of₹_150 crore and above from the banking system, the limit has to be carved out into two components namely
  • Working capital limit or ‘Loan component’ (40 percent of the aggregate limit) and
  • Cash Credit (60 percent)

Loan Component:

1. The central bank has stipulated that drawings up to 40 percent of the overall fund based working capital limits will only be allowed from the ‘Loan component’ and drawings in excess of the minimum ‘Loan component’ threshold will be allowed in the form of cash credit (CC)facility.
2. This means the borrowers will not only pay interest on the 40 percent loan component and drawings from CC limit but may also have to pay commitment charges on the un-availed portion of the CC limit.

Loan System for Delivery of Bank Credit

1. Under the norms on ‘Enhancing Credit Supply for Large Borrowers through Market Mechanism’, the large borrowers are required to access 50 percent of their incremental funding requirement via market instruments
2. Also, it could be seen that India Inc tap the bond market in a big way, with banks also investing in these instruments, as per information received.
3. In a bid to rein in borrowing costs, corporates are expected to tap the bond market progressively for their short- and long-term funds.
4. This, in turn, will impact banks’ margins since the return on assets in the case of loans is generally higher than the return on investment on market instruments.