Non-banks have sought clarity from the Reserve Bank of India (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, after the central bank proposed barring them from issuing such facilities.
Some have pleaded with 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.
“RBI’s issue may not be with the product itself but probably a visibility concern,” said Jatinder Handoo, chief executive of industry body United Fintech Forum (UFF). “We need to find a way to work closely with the regulator to resolve or address those concerns because it doesn't appear to be a quantum issue, but about a lack of visibility around what is happening when you disburse a credit line,” he said.
“It's a transaction-based product, hence, controls and checks and balances could be put in place to address any concerns,” Handoo said, suggesting more transparency through new technologies like blockchain and artificial intelligence, where all stock stakeholders, including at the merchant level, have visibility around what is happening in the system.
Other suggestions include adopting tools such as utilization pattern monitoring, mandatory re-underwriting on repeated drawdowns, reassessment of repayment capacity on persistent utilization, and supervisory testing of whether fresh drawings are servicing old obligations.
“Those (help) distinguish a healthy revolver from a cosmetic one. A blanket prohibition doesn’t,” said Vivek Bimbrahw, former banker and consulting head-stakeholder relations, at think tank National Council of Applied Economic Research (NCAER).
The UFF, formerly known as the Digital Lenders’ Association of India (DLAI), and the Finance Industry Development Council (FIDC), the apex representative body and self-regulatory organisation for non-banking financial companies (NBFCs), have submitted their suggestions to RBI.
The central bank had sought feedback on the 6 August draft circular by 28 August.
The draft raised concerns among non-banks about its impact on business, particularly certain credit facilities extended to MSMEs and small businesses, as well as their access to capital.
In a 10 August note, Kotak Institutional Equities said that the norms will increase operational nuances, lower interest returns for lenders, and lead to higher operational expenses for borrowers, flagging that NBFCs such as Aditya Birla Finance, Bajaj Finance, and Tata Capital may take a hit.
NBFCs offer flexi/revolving credit facilities, mostly to MSME loan customers, including secured loans against property, unsecured loans, supply-chain loans, and working capital loans, and, in some cases, personal and professional loans.
The FIDC, in its submission, said that many small and medium NBFCs, including captive NBFCs, deal exclusively in such products. “Consequent to such prohibition, the economic rationale for their continued existence shall be severely dented, leading to loss of investor/public funds and employment to personnel working in such NBFCs.”
RBI’s concerns, on the other hand, seem to stem from credit line-like products, wherein lenders typically sanction an overarching credit line to borrowers, who then have the option to withdraw only the amount they need. However, in certain cases where borrowers are under financial stress or unable to repay, they tend to withdraw more from the sanctioned line, or lenders extend more credit to avoid declaring the account as stressed or delinquent.
“That is evergreening wearing a product label. With household leverage climbing, it’s a fair thing to worry about,” said Bimbrahw. “The regulator’s concern is legitimate: A revolving facility can quietly mask deterioration,” he said.
But NBFCs typically serve borrowers who don’t meet banks’ credit filters. “Take revolving credit away from NBFCs, and that customer does not migrate to a bank overdraft. He simply loses the product,” Bimbrahw said, adding that in such a scenario, micro-entrepreneurs with lumpy, seasonal cash flows end up running multiple term loans and paying interest on even idle money.
