Vinu: Manu, I’m a bit confused about the terms renewal and review of working capital credit facilities by banks. Could you explain the difference, especially with reference to RBI guidelines?

Manu: Sure, Vinu! The concepts of renewal and review are quite important, and although they both involve checking a business's credit facility, they serve different purposes.

1. Renewal of Working Capital Credit Facilities

Vinu: What exactly does renewal mean in the context of working capital credit facilities?

Manu: Renewal refers to the process of extending or revalidating an existing working capital credit facility after its tenure has expired. When a credit facility comes up for renewal, the bank evaluates whether the borrower still qualifies for the same terms and credit limit.

Vinu: So, it's mainly about continuing the existing credit?

Manu: Exactly! The renewal process checks whether the borrower still meets the eligibility criteria and whether they need the same amount of credit. If everything looks good, the bank will extend the facility for another period. It’s a way to ensure that the borrower’s financial condition still justifies the credit being provided.

2. Review of Working Capital Credit Facilities

Vinu: And what about review? How is that different?

Manu: A review is a more frequent, periodic assessment of the borrower’s financial health and the appropriateness of their credit facility during its life cycle. While a renewal is typically done at the end of the credit facility’s term, a review happens periodically—usually quarterly, semi-annually, or annually—depending on the bank’s policies.

Vinu: So, it’s like checking in on the borrower’s financial situation during the tenure of the credit?

Manu: Yes, exactly! The bank reviews the borrower’s performance, including their profitability, liquidity, and working capital management. The review ensures that the facility is still in line with the borrower’s current financial needs. If things have changed, the bank may adjust the credit terms, such as increasing or decreasing the working capital limit.

Vinu: How do these processes fit into the RBI guidelines?

Manu: The RBI Master Circular on Management of Advances specifies that renewal and review are part of the bank’s routine credit risk management. For renewal, banks must evaluate whether the borrower still needs the same working capital facility. This is usually done annually. Review, on the other hand, is meant to be done regularly throughout the year—often quarterly or semi-annually. During the review, banks assess the borrower’s current financial situation to ensure that the credit facility remains adequate and appropriate.

Vinu: So, renewal is about extending the credit based on the borrower’s continued need, while review is about making adjustments based on their current performance?

Manu: Exactly! To summarize:

Renewal is about extending the credit facility, typically at the end of its term, to ensure the borrower still qualifies for the same terms.

Vinu: This makes a lot more sense now. Thanks, Manu!

Manu: Glad to help, Vinu!