5 days ago
India's NBFC Body Urges RBI to Ease Revolving Credit Restrictions
India’s banking regulator wants to limit the kinds of loans some finance companies can offer.
The proposal would mostly allow these companies to provide term loans instead of revolving credit.
Revolving credit lets a borrower take money, repay it, and borrow again up to a set limit.
Small businesses often use it to buy materials and repay the loan after customers pay them.
The regulator is concerned that some borrowers could use this kind of loan to pay old debts.
The Finance Industry Development Council disagrees with a complete restriction.
It says the change could make it harder for small businesses to get working-capital money.
The group also says the proposed rules could increase interest and operating costs.
The Finance Industry Development Council asked the Reserve Bank of India to reconsider proposed restrictions on NBFC revolving credit products.
RBI’s draft guidelines would generally limit NBFCs to offering term loans unless they are authorised to issue credit cards.
FIDC said a ban could reduce NBFC participation in trade and working-capital finance, especially for MSMEs.
RBI has raised concerns that revolving credit could be used to repay existing debts, creating cycles of borrowing.
FIDC also asked RBI to allow replenishment of repaid principal ahead of schedule, subject to safeguards.
- Who
- The Finance Industry Development Council, representing India’s non-banking finance companies, and the Reserve Bank of India.
- What
- FIDC asked RBI to ease proposed restrictions on revolving credit products and revise the definition of term loans.
- Where
- India.
- When
- FIDC sent its letter on Thursday; RBI issued the proposal earlier this month.
- Why
- FIDC says the restrictions could reduce financing for small businesses and increase their costs, while RBI is concerned that revolving credit may contribute to cycles of debt.
FIDC’s Position
RBI’s Position
Restrictions on revolving credit
FIDC’s Position
A blanket ban could materially reduce NBFC participation in trade and working-capital finance, particularly for MSMEs and borrowers with limited bank access.
RBI’s Position
RBI proposed limiting NBFCs to term loans because of concerns about high-risk revolving credit products.
Debt risks
FIDC’s Position
FIDC argues that revolving facilities support recurring business production cycles by allowing borrowers to draw and repay funds as needed.
RBI’s Position
RBI is concerned borrowers may use revolving credit to repay existing dues, creating a cycle of debt.
Replenishing repaid principal
FIDC’s Position
FIDC wants NBFCs to be allowed to restore or replenish principal repaid ahead of schedule, subject to safeguards, saying the current restriction could raise interest and operating costs.
RBI’s Position
RBI’s draft definition of a term loan would require limits not to be restored or replenished after principal repayment.
Key facts
- Industry body
- Finance Industry Development Council (FIDC)
- Regulator
- Reserve Bank of India (RBI)
- Proposed rule
- NBFCs would generally be limited to offering term loans unless authorised to issue credit cards.
- Revolving credit
- A facility allowing borrowers to draw, repay and draw again within a predetermined limit.
- Main affected borrowers
- Small and medium businesses, including MSMEs with limited access to bank-based working-capital facilities.
- FIDC request
- Permit restoration or replenishment of principal repaid ahead of the contractual schedule, subject to safeguards.
Quotes
Finance Industry Development Council (FIDC)
Industry body representing India’s non-banking finance companies
“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”
CNBC TV 18
Sources
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