Limits in Cash Credit

Diverting funds to unspecified activity is violation of loan agreement

Srinagar, Publish Date: Dec 11 2018 10:54PM | Updated Date: Dec 11 2018 10:54PM
Limits in Cash Credit

One of the most popular business loans in retail segment is the Cash Credit  facility offered by banks. Most commonly referred as CC limit, it serves as a dependable working capital resource for the businesses. Since the day I boarded the banking industry platform in 1990, I witnessed this CC limit serving as lifeline to the businesses, particularly the small retail businesses. There are innumerable successful business/entrepreneurship stories around us which have a seed in small cash credit facility extended by the banks in their incipient stage.

One of the beautiful features of this CC facility is the flexibility of enhancing the loan limit in line with the growth of the business of the borrowers without hassles. The loan limit is fixed as per the working capital requirements of the borrower in line of the activity.

You must be wandering what exactly prompted me today to take up this CC limit facility for deliberations. Actually, many borrowers who are currently enjoying this facility are ‘annoyed’ with their banks for under-limiting their CC facility and refusing to sanction any enhancement in the existing loan limits. When I took up these complaints with their respective banks, I found that most of the complainants were not justified in their claims or enhancement requests. Their business transactions and stock statements were not matching their projected financial needs. They could not even justify investment of loan amount already availed. Most of such accounts were in stress. 

If the bank staff at operational level is to be believed, a section of borrowers enjoying CC limit have developed a habit of bringing their accounts in stress to press for unjustified enhancement in loan limits. The bank officers even claim stocks not matching the quantum of the loan facility availed in such cases and even in some cases the businesses don’t exit for which a CC limit was sanctioned. The number of such errant borrowers is reported to be growing alarmingly giving sleepless nights to the lenders (banks).

To be precise, over a period of last few years, some sections of businesses have been misusing this CC facility. In other words,  misuse of CC limit is rampant in retail business segment. It’s spreading like a termite and banks (lenders) are helplessly watching the misuse of their funds. 

The scenario raises two important questions. Why is the loan facility misused? How are the funds misused? In a conflict situation prevailing here, the businesses are unsure about the proper working days. To mitigate the loss of working days, they are always for a look out to find , not exactly alternate, but additional earning support. For venturing into the additional income generating activity, they need funds. It’s here they siphon out a portion of funds available in their core business and invest them in the new venture. The new venture is mostly real estate business where liquidity is an issue. Over a period of time their funds get blocked, puts their core business activity under stress and ultimately their CC limit turns a non performing asset (NPA) when banks genuinely refuse to enhance their loan limit.

It’s simply the diversion of funds by the borrowers to segments where they are confronted with liquidity problem. Once in stress, these borrowers approach the bank with enhancement proposal. Most of such proposals are rejected by the bank on technical grounds. The account of such borrowers reflects very low business turnover, which is well below the loan facility enjoyed by the borrower. Such businesses fail to justify the investment of bank loan in the core activity for which the limit was sanctioned.

Legally speaking, such diversion of funds without the consent of the lender (Bank) is in violation of the loan agreement, which is a contract. , As per the agreement the borrowers are required to use the funds for the purpose of activity they have been given the loan.

However, this is not applicable to a personal loan. One can use it for business, but vice-versa is not acceptable at all. So, the scenario is not healthy as credit culture is losing trust. There is need to restore the trust by adhering to the loan agreement. By virtue of this loan agreement, you need to invest the loan amount for the specified activity only and not in any other business. The bank file criminal charge against such errant borrowers.

(The views are of the author and not that of the institution he works for)

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