Master Circular For Management of Advances UCBs – April 2025

1. Working Capital Assessment & Delivery

The circular prescribes distinct methodologies for assessing working capital based on the borrower’s credit limit size, transitioning from rigid turnover-based assessments to more flexible, bank-determined methods for larger exposures.

Assessment Methodologies

To enforce financial discipline, UCBs must split working capital limits for large borrowers into “Loan” and “Cash Credit” components.

• Applicability: Borrowers with working capital limits of ₹10 Crore and above.

• Mandatory Split:

  • Loan Component: Minimum 80%.

  • Cash Credit Component: Maximum 20%.

• Operational Flexibility: UCBs can increase the loan component beyond 80% if desired. Separate interest rates can be charged for each component.

• Ad-hoc Limits: Permitted only for temporary requirements after existing limits are exhausted. Repeated ad-hoc limits without justification are prohibited.

2. Credit Administration & Interest Rates

The RBI emphasizes transparency and fairness in lending practices, moving away from punitive interest regimes to standardized charges.

• Interest Rate Policy: Rates must be approved by the Board and be transparent.

  • Foreclosure Charges: Prohibited on floating rate term loans sanctioned to individual borrowers for purposes other than business.

  • Reset of Floating Rates: Banks must assess borrower repayment capacity before resetting EMI-based floating rate loans to avoid shock.

• Penal Charges (Not Penal Interest):

  • Penalties for non-compliance must be levied as fixed “Penal Charges” and not added to the interest rate.

  • Capitalization Prohibited: No interest can be computed on penal charges.

  • Priority Sector Exemption: No penal charges for loans up to ₹25,000.

• Key Facts Statement (KFS): Mandatory provision of a KFS to borrowers containing all critical loan terms, including the Annual Percentage Rate (APR) and recovery mechanisms.

3. Monitoring and End-Use of Funds

UCBs are held primarily responsible for ensuring funds are used for the stated purpose.

• Diversion of Funds: Defined as using short-term working capital for long-term purposes, transferring funds to subsidiaries, or investing in other companies without approval.

• Siphoning of Funds: Using borrowed funds for purposes unrelated to the borrower’s business to the detriment of the entity.

• Safeguards:

  • Stock Audits: Periodic verification of hypothecated stocks.

  • No Objection Certificate (NOC): Mandatory before opening current accounts or financing borrowers of other banks.

  • Chartered Accountant Certification: Required for end-use verification in project financing.

4. Specific Lending Activities: Gold Loans

Strict safeguards are imposed to mitigate risks in loans against gold ornaments.

• Valuation:

  • Must be done by an approved appraiser.

  • Rate: Average closing price of 22-carat gold for the preceding 30 days (IBJA rates).

  • LTV Ratio: Maximum 75% of the value.

• Bullet Repayment Scheme:

  • Allows repayment of principal and interest at the end of the term.

  • Maximum Limit: ₹2.00 Lakh (Standard).

  • Enhanced Limit: ₹4.00 Lakh for UCBs meeting Priority Sector Lending (PSL) targets.

  • Tenor: Maximum 12 months.

• Prohibitions: No loans allowed for purchasing gold in any form (bullion, coins, ETFs).

5. Restructuring of Advances

Restructuring is a tool to preserve economic value, not to evergreen bad loans.

• Eligibility: Accounts classified as ‘Standard’, ‘Sub-standard’, or ‘Doubtful’.

• Conditions:

  • Viability Established: Borrower must be able to service debt under new terms.

  • No Retrospective Effect: Restructuring cannot be applied retroactively.

  • Frauds Ineligible: Borrowers involved in fraud/malfeasance are disqualified.

• Natural Calamities: Separate restructuring framework applies (see below).

6. Relief Measures for Natural Calamities

Automatic relief mechanisms trigger upon declaration of a natural calamity (Annewari < 50% crop yield).

• Restructuring Mechanism:

  • Short-term Crop Loans converted to Term Loans.

  • Repayment Period: Extended to 3-5 years (up to 7-10 years for severe calamities).

  • Moratorium: Minimum 1 year on principal and interest.

• Asset Classification:

  • Restructured crop loans are treated as Current Dues (Standard Asset).

  • No NPA classification if restructured within 3 months of the calamity.

• Fresh Finance:

  • Consumption Loans: Up to ₹5,000 without collateral.

  • Fresh Crop Loans: Treated as current dues irrespective of previous defaults.

7. Loans to SHGs and JLGs

• Self Help Groups (SHGs):

  • Loan Amount: Normally 4 times the group’s savings; up to 10 times for well-managed groups.

  • Unsecured Limits: Do not apply to SHGs.

• Joint Liability Groups (JLGs):

  • Loans treated as unsecured if not backed by tangible security.

  • Subject to individual exposure limits.

• Intermediaries: Lending must be direct; financing through intermediaries is prohibited.

8. Annexure Highlights

• Valuation of Properties (Annex 2): UCBs must have a Board-approved policy for empanelment of independent valuers. For properties valued at ₹50 Crore or above, two independent valuation reports are mandatory.

• Gold Safeguards (Annex 3): Strict custody norms (joint custody, strong rooms), regular surprise verification, and insurance coverage against burglary are mandatory.

• Key Facts Statement (Annex 1): Detailed format prescribed, requiring disclosure of “All-in-Cost” (APR), cooling-off periods for digital loans, and grievance redressal details.

We have made the summary of the circular for the convenience of readers. We have taken all due care to get the list of the notification but to get the exact text for the notification and it’s implication we recommend readers to visit the RBI website https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=12827