FIDC to Fight RBI’s Revolving Credit Ban for NBFCs
By Business Desk
FIDC plans to challenge RBI’s proposed ban on revolving credit for NBFCs, impacting ₹2 trillion in credit and potentially disadvantaging MSMEs and individuals.
The Finance Industry Development Council (FIDC) is preparing to voice significant concerns to the Reserve Bank of India (RBI) regarding its proposed ban on revolving credit products. This move could create regulatory arbitrage, potentially favoring banks over Non-Banking Finance Companies (NBFCs).
NBFC executives indicate this restriction threatens a credit portfolio exceeding ₹2 trillion, particularly affecting Micro, Small, and Medium Enterprises (MSMEs) and individuals reliant on flexible short-term credit facilities. A blanket prohibition would disadvantage NBFCs compared to banks, which can continue offering similar working-capital solutions.
Understanding RBI’s Draft Guidelines
The RBI’s draft guidelines, issued on August 6, propose that NBFCs exclusively offer term loans, effectively prohibiting revolving credit facilities. Under this framework, a term loan has a predetermined repayment schedule and a non-replenishing sanctioned limit. This means repaid amounts would not automatically become available for fresh borrowing without a new underwriting process.
Revolving credit products, crucial for short-term working capital, allow borrowers to repeatedly draw, repay, and redraw funds within an existing limit. Replacing these with repeated term loans would significantly escalate underwriting, documentation, and servicing requirements for NBFCs, increasing costs and turnaround times for borrowers.
Industry Concerns and Portfolio Impact
The RBI’s proposal stems from supervisory concerns raised during earlier inspection cycles. However, NBFCs argue that their modified products have not shown a widespread decline in credit quality, challenging the necessity of a blanket ban.
- Credit portfolio affected: ₹2 trillion
- Annual growth rate of affected segment: 15-20 percent
- Estimated portfolio doubling time: four years
The FIDC is actively gathering feedback from its members, including NBFCs specializing in supply-chain finance, loan against property (LAP), and MSME lending. The council will emphasize the potential widening of the competitive gap between banks and NBFCs in its formal submission to the central bank.