India's NBFC body asks RBI to ease restrictions on revolving credit
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…
In a letter to the Reserve Bank of India (RBI), India's representative body of non-banking finance companies (NBFCs) has called for the reconsideration of the proposed blanket restriction on revolving credit products. The RBI recently suggested limiting NBFCs from offering such revolving loan products, unless they possess the authorization to issue credit cards.
Revolving loans are a type of credit arrangement that permits borrowers to draw down, repay, and re-draw loans within a predetermined credit limit. Typically utilized by small businesses to purchase raw materials and make repayments after receiving payments from customers, these facilities can be reinvested for the subsequent production cycle.
The draft guidelines from the RBI propose that NBFCs should only be permitted to offer term loans, following concerns raised by the central bank regarding NBFCs offering high-risk loan products, such as revolving credit lines.
In their letter, the Finance Industry Development Council (FIDC) highlighted that a ban on revolving credit would result in significant consequences for multiple loan products offered by NBFCs, including loans to small and medium businesses (MSMEs) and loans against securities. The FIDC stated that the prohibition of such products would lead to a substantial contraction in NBFCs' participation in India's trade and working-capital finance market, particularly for MSMEs and borrowers with limited access to bank-based working-capital facilities.
Moreover, the industry body urged the RBI to reconsider the definition of a term loan, which currently mandates that the sanctioned limit must be restored or replenished after the repayment of principal. The FIDC argued that this restriction would result in an increased interest burden and operational costs for small businesses. They asked the RBI to allow the restoration or replenishment of principal repaid ahead of the contractual schedule, provided that appropriate safeguards are in place.
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