The Finance Industry Development Council (FIDC), the self-regulatory organisation for the non-banking finance company sector, is set to flag divergent concerns among lenders over the Reserve Bank of India's proposed ban on revolving credit products. According to Business Standard, 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. Raman Aggarwal, CEO of FIDC, stated that as an industry body and more importantly as an SRO, it is their responsibility to provide balanced feedback, with the views being 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.
India's largest non-banking finance companies are mounting a coordinated challenge to the Reserve Bank of India's proposed blanket prohibition on revolving credit products. According to reports from The Economic Times, senior representatives of major NBFCs including Bajaj Finance, Tata Capital and Shriram Finance met on August 14 to discuss their concerns. The lenders plan to make a formal representation through the Finance Industry Development Council this week, seeking a meeting with RBI officials to reconsider the proposed restriction. As per The Economic Times, the industry will press for a meeting between RBI officials and a representative cross-section of NBFCs to discuss the amendment's potential impact on credit growth, borrower access, competition and the broader non-bank lending sector.
The industry contends that the proposed restriction could disrupt credit products worth more than ₹2 trillion and constrain access to finance for micro, small and medium enterprises (MSMEs) and individuals. According to Business Standard, senior NBFC executives said the proposed restriction could affect credit products with an outstanding portfolio of more than ₹2 trillion. The market for such products is growing at 15-20% annually and is expected to nearly double over the next four years. Nearly 90% of this lending caters to MSMEs and individuals, with the products having neither displayed adverse credit behaviour nor resulted in unusually high credit costs. The chief executive of an NBFC told The Economic Times that the draft amendment does not set out regulatory rationale or specific supervisory concerns for the complete prohibition, making the breadth of the proposed definition concerning for established credit products.
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. According to Business Standard, 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 industry argues that the proposed restriction could create regulatory arbitrage in favour of banks, as banks would continue to offer similar working-capital and short-term liquidity facilities. An NBFC official told Business Standard that 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. Another official warned that replacing revolving facilities with repeated term loans would increase underwriting, documentation and servicing requirements, adding to the cost and turnaround time for borrowers. 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.
