Firms Barred From Pre-Paying Loans Out Of Cp Funds

The RBI has allowed companies to issue CPs up to 100 per cent of the maximum permissible bank finance, but has not allowed automatic reinstatement of the credit limits.

The bank has clarified that the amount of CPs to be issued by bank borrowers would be first adjusted from the cash credit component and then from the loan component.

In a circular to all commercial banks, the central bank detailed the modalities of raising funds through CPs since the credit policy statement had simply stated that the CP issued would not be restricted to the cash credit component.

CPs can be issued by all eligible bank borrowers up to 100 per cent of the sanctioned working capital (fund-based) limit. The working capital limit of every company issuing commmercial paper will correspondingly be reduced by the financing banking company.

 

"However, no prepayment of the loan component already availed of by the borrower will be permitted for CP issue in lieu thereof," the circular stated. This indicates that a company will not be allowed to prepay the loan component and ask the bank to convert the unavailed of portion of the loan component as CP.

The working capital (fund-based) limit shall, according to RBI, mean the aggregate limits including those by way of purchase/discount of bills sanctioned by one or more banking companies for meeting the working capital requirements based on the MBPF, as also working capital term loans (WCTL) if any, in the manner stipulated by the RBI.

Companies issuing CPs must have a tangible net worth of not less than Rs 4 crore, working capital limit above Rs 4 crore and a specified minimum credit rating from CRISIL, ICRA, CARE or Duff & Phelps.