FIDC to flag NBFC concerns over RBI’s proposed revolving credit ban | Finance News
The Finance Industry Development Council (FIDC), the self-regulatory organisation (SRO) for the non-banking finance company (NBFC) sector, is set to flag divergent concerns among lenders over the Reserve Bank of India’s (RBI’s) proposed ban on revolving credit products, with the industry arguing that the move could create regulatory arbitrage in favour of banks.
The industry body is collating views from NBFCs, including those engaged in supply-chain finance, loan against property (LAP) and micro, small and medium enterprise (MSME) lending, before submitting its feedback to the central bank within the prescribed deadline.
“We are in the process of collating views from our members and will submit detailed feedback to the RBI within the prescribed timeline. As an industry body and, more importantly, as an SRO, it is our responsibility to provide balanced feedback. The views are varied, as FIDC has members across the spectrum, including large and small NBFCs, as well as those engaged in supply-chain finance, loan against property and MSME lending. We are taking all these views into consideration while preparing our submission,” Raman Aggarwal, CEO, FIDC, said.
Senior NBFC executives said the proposed restriction could affect credit products with an outstanding portfolio of more than ₹2 trillion. They said the move could particularly affect MSMEs and individuals that rely on flexible short-term credit facilities.
“A blanket prohibition could put NBFCs at a disadvantage vis-à-vis banks, which continue to offer similar working-capital and short-term liquidity facilities,” an NBFC official said.
“Replacing revolving facilities with repeated term loans would increase underwriting, documentation and servicing requirements, adding to the cost and turnaround time for borrowers,” another official said.
The RBI, in its draft guidelines issued on August 6, proposed restricting NBFCs to offering only term loans, effectively barring them from providing revolving credit facilities.
Under the proposed framework, a term loan would have a predetermined repayment schedule and a non-replenishing sanctioned limit. Once the borrower repays an amount, the limit would not become available for fresh borrowing. Any additional borrowing would require fresh underwriting and sanction.
The draft norms would, therefore, prevent NBFCs from offering products that allow borrowers to repeatedly draw, repay and redraw funds within an existing sanctioned limit. Such facilities are commonly used to meet short-term working-capital and liquidity requirements.
The RBI’s proposal comes after its supervisory department raised concerns over revolving credit products offered by NBFCs during earlier inspection cycles. Following consultations with the regulator, lenders said they had modified their products and processes to address the concerns.
NBFCs, however, have argued that the products have not shown widespread deterioration in credit quality or unusually high credit costs after the changes. The industry estimates the affected segment is growing at 15-20 per cent annually and could nearly double over the next four years.
The industry is also likely to argue that a one-size-fits-all restriction could affect legitimate working-capital and liquidity requirements, particularly among MSMEs, the official said.
The proposal could widen the competitive gap between banks and NBFCs, lenders said, as banks would continue to offer similar working-capital and short-term liquidity facilities. FIDC is expected to incorporate these concerns while making its formal submission to the RBI.
