India's NBFC body asks RBI to ease restrictions on revolving credit
- India's NBFCs are challenging RBI's proposed ban on revolving credit, fearing it will severely restrict funding for small and medium enterprises
MUMBAI: The representative body of India’s non-banking finance companies (NBFCs) has urged the Reserve Bank of India to reconsider the proposed blanket restriction on revolving credit products offered by NBFCs, according to a letter seen by Reuters.
Earlier this month, RBI proposed to curb NBFCs from offering revolving loan products, unless they are authorised to issue credit cards. A revolving loan is a type of credit arrangement that allows borrowers to draw down, repay and re-draw loans within a predetermined credit limit. Small businesses typically use such facilities to buy raw materials and repay the amount after receiving payments from its customers, drawing again for the next production cycle.
Under its draft guidelines, RBI said that NBFCs should only be allowed to offer term loans. The proposal followed concerns the central bank had raised around NBFCs offering high-risk loan products such as revolving credit lines, amid worries that borrowers may use such credit to repay existing dues, creating a cycle of debt.
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In a letter to the RBI on Thursday, the Finance Industry Development Council (FIDC) said that a ban on revolving credit would have unintended consequence for multiple loan products offered by NBFCs including loans to small and medium businesses and loans against securities.
“The consequence of prohibition of such product would therefore not be a marginal product realignment at NBFC end; it would be material contraction in the participation of NBFCs in India’s trade and working-capital finance market, particularly for MSMEs and borrowers who have relatively limited access to bank-based working-capital facilities,” said the industry body in the letter.
FIDC also urged RBI to revisit the definition of a term loan, which mandates restoring or replenishing a sanctioned limit after repayment of principal. The industry body argued that this restriction would result in a higher interest burden and operational costs for small businesses.
The industry body has asked RBI to permit restoration or replenishment of principal repaid ahead of the contractual schedule, subject to safeguards.
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