RBI draft norms may bar NBFCs from revolving credit facilities

The Reserve Bank of India's (RBI) draft regulations could significantly alter the lending landscape for non-banking financial companies (NBFCs). A key proposal in the draft norms would bar NBFCs from offering revolving credit facilities to borrowers.

Revolving credit, a flexible borrowing arrangement that allows customers to draw, repay, and redraw funds up to a preset limit, has become a popular product among retail and small business borrowers. This move, if implemented, would have wide-ranging implications for both NBFCs and their customers.

What the RBI draft proposes

The draft norms, released for public comment, aim to tighten the regulatory framework governing NBFCs. The proposed restriction on revolving credit is part of a broader effort to standardise lending practices and mitigate risks in the sector.

Industry experts suggest that the prohibition is intended to address concerns around borrower over-leveraging and the potential build-up of systemic risk. Revolving credit, by its nature, can encourage repeated borrowing, which may lead to higher debt levels among consumers and small enterprises.

Impact on NBFCs and borrowers

For NBFCs, revolving credit has been a significant revenue generator. The product typically carries higher interest rates than term loans, and the convenience factor attracts a loyal customer base. A ban would force these institutions to redesign their product offerings and potentially shift focus to more traditional loan structures.

Borrowers, particularly those in the informal sector and micro-enterprises, may find it harder to access quick, flexible funding. Many rely on revolving credit lines to manage working capital needs or unexpected expenses. The absence of such facilities could push them towards informal lenders or other, potentially costlier, sources of finance.

Regulatory intent and industry response

The RBI's move is seen as part of its ongoing efforts to strengthen consumer protection and ensure financial stability. By limiting the availability of revolving credit, the central bank aims to curb aggressive lending practices and encourage more disciplined borrowing.

Industry bodies and individual NBFCs are expected to submit their feedback during the consultation period. Some may argue that a blanket ban is too restrictive, suggesting instead that the RBI could impose stricter eligibility criteria or lower credit limits to address the risks.

What lies ahead

The final norms, which will be issued after reviewing stakeholder comments, will determine the future of revolving credit in the NBFC sector. Until then, NBFCs and their customers will have to wait and watch, as the industry braces for a potential shift in its lending playbook.