FIDC Challenges RBI Revolving Credit Rules for NBFCs

The Finance Industry Development Council (FIDC), representing India’s non-banking finance companies (NBFCs), has formally requested the Reserve Bank of India (RBI) to reconsider its proposed restrictions on revolving credit products. This appeal follows the RBI’s recent proposal to limit NBFCs from offering such products unless they possess authorization to issue credit cards.

Understanding Revolving Credit

Revolving loans offer a flexible credit arrangement, allowing borrowers to draw, repay, and re-draw funds within a predetermined credit limit. These facilities are particularly crucial for small businesses.

They enable companies to finance raw material purchases and manage working capital effectively, by repaying amounts after customer payments and then re-drawing for subsequent production cycles.

RBI’s Rationale for Proposed Restrictions

The RBI’s draft guidelines suggested that NBFCs should exclusively offer term loans. This stance is driven by concerns that high-risk revolving credit lines could potentially lead borrowers into a cycle of debt, prompting them to use new credit to repay existing dues.

FIDC’s Counterarguments and Market Impact

In its communication to the RBI, FIDC highlighted that a blanket ban on revolving credit would have severe unintended consequences across various NBFC loan products. This impact would extend to crucial areas like small and medium businesses, and loans against securities.

• Such a prohibition would not merely be a minor product adjustment for NBFCs.
• It would lead to a significant contraction in their involvement in India’s trade and working-capital finance market.
• This would be particularly detrimental to Micro, Small, and Medium Enterprises (MSMEs) and other borrowers who often have limited access to traditional bank-based working-capital facilities.

Redefining Term Loans for Business Efficiency

Furthermore, FIDC urged the RBI to re-evaluate the definition of a term loan. Specifically, the council challenged the mandate that a sanctioned limit can only be restored or replenished after the principal has been fully repaid.

• The industry body argued that this restriction would impose a higher interest burden and increased operational costs on small businesses.
• As an alternative, FIDC proposed allowing the restoration or replenishment of principal repaid ahead of the contractual schedule, provided appropriate safeguards are in place.