MUMBAI, Nov 5: The Reserve Bank of India (RBI) has barred banks and financial institutions from granting bridge loans to the non-banking finance companies. The RBI has also directed banks to obtain security for bridge loans which was in its earlier avatar an unsecured credit.

The central bank revived the bridge loan concept at the busy-season monetary and credit policy announced on October with a rider that the credit extended in this category cannot exceed five per cent of the incremental deposits of the previous year. The central bank issued the detailed circular this week.

"It has been decided that banks may henceforth grant bridge loans to companies -- other than NBFCs -- against public issue of equity, whether in India or abroad," the RBI directive said.

The RBI has also directed commercial banks to frame guidelines for extending bridge loans and get the necessary board approval.

In another significant relaxation that will help in the development of the commercial paper market, the apex bank has directed all banks to dispense away with the requirement of minimum current ratio of 1.33:1 as part of the eligibility conditions for issue of CP by a corporate.

In a bid to ease the credit delivery systems, the RBI has allowed banks to decide on the manner in which the restoration of the working capital limit should be done. At Present, the enhancement of working capital limit is done on repayment of the commercial paper. The Reserve Bank banned the granting of bridge loans to all companies including finance companies on April 20, 1995, in the wake of the MS Shoes fiasco which rocked the industry in the last quarter of 1994-95. A number of public sector banks failed to recover the fund extended to the Pawan Sachdeva-run company under bridge loan facility. A new variant of bridge loan was reintroduced in slack-season credit policy in October last year. However, that did not take off.

Prior to that in October 1995 the Reserve Bank allowed banks to grant bridge loans against an underwriting commitment of a financial institution and/or a bank in the event of the latter institution facing temporary liquidity constraints.

This time the apex bank has kept bridge loan in this segment outside the five per cent ceiling of the banks' incremental deposits of the previous year. The directive has also stipulated that banks must comply with individual/group exposure norms while granting bridge loans. In addition to that, they must ensure the end-use of bridge loans. The maximum period of the loan has been pegged at one year.

The Reserve Bank directive further said that the quantum of outstanding bridge loan (or the limit sanctioned-whichever is higher) during the year along with the outstanding investments in shares and convertible debentures and mutual fund units (not dedicated to debt funds) and outstanding loans to corporates for meeting the promoters' contribution to equity of new companies should be within the stipulated five per cent limit.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.