The Reserve Bank of India’s (RBI) recent draft circular seeking to bar non-bank financial companies (NBFCs) from offering revolving credit products is not a new proposal, but a clarification that such lenders were never permitted to offer these loans in the first place, governor Sanjay Malhotra said on Wednesday.
At the post-monetary policy conference, Malhotra said the draft proposal is not a “new rule or law,” adding that individual non-banks offering such products had been warned and directed multiple times by the regulator before the draft circular was issued.
The development of digital technology has enabled non-bank lenders to offer such revolving credit products in the form of term loans, prompting the central bank to formalize these directions through a draft circular, he added. Revolving credit allows a borrower to draw, repay and redraw funds up to a pre-approved limit, rather than taking a fixed loan that is repaid in scheduled instalments.
In a draft circular released on 6 August, the RBI proposed limiting NBFC lending strictly to term loans, effectively barring them from offering revolving credit facilities such as flexi-loans. The central bank introduced the guidelines to mitigate systemic stability risks, prevent loan evergreening and address NBFCs’ liquidity vulnerabilities. The deadline for submitting feedback on the circular was 28 August.
As part of their feedback, NBFCs, through industry bodies, have sought clarity from the RBI on the definition of revolving credit and exemptions for certain micro, small and medium enterprise (MSME)-focused products, including supply-chain finance and invoice discounting.
Lenders have also urged the regulator to allow revolving credit facilities, albeit with tighter underwriting and disclosures to address any concerns, or issue a new framework for such loan products, Mint reported on 2 September.
On Wednesday, Malhotra acknowledged that the RBI has received substantial feedback on the draft, which is being discussed and considered. The central bank will eventually issue fresh directions on the matter, keeping in mind systemic liquidity risks arising from such products and the need for such funding options in the current environment, he said.
The industry feedback is currently being examined by various RBI departments, which will eventually submit their report to Malhotra, following which a collective decision will be taken, he added.
NBFC credit growth continues to be robust, both in terms of bank lending to NBFCs and lending by NBFCs to “the real economy,” even though it remains lower than lending by banks, Malhotra said. He added that the RBI has not observed any issues pertaining to asset quality at non-bank lenders.
“We do not see any issues or concerns relating to asset quality with regard to NBFCs. We are always alert to such risks getting developed, not only from an asset quality point of view, but also on demand and price pressures getting built. So, we are conscious of such risks, but we do not see any such risks getting built as of now.”
