RBI's draft curbs on revolving credit may impact NBFC flexi loans: Morgan Stanley
Mumbai, August 7
The Reserve Bank of India's draft directions proposing restrictions on revolving credit facilities offered by non-banking financial companies could affect flexi and overdraft loan products across corporate, MSME and unsecured personal loan segments, according to a Morgan Stanley report.
The report said the RBI's draft framework seeks to restrict NBFCs from offering revolving credit products, except for entities authorised to issue credit cards. Under the proposal, loans would need to follow a pre-determined amortisation schedule, while sanctioned limits would not be restored or replenished after principal repayments.
"We think flexi and overdraft loans by NBFCs operating in corporate, MSME and unsecured personal loan segments, are likely to be impacted," Morgan Stanley said in the report.
Despite the proposed restrictions, the brokerage believes the industry has scope to adapt its products without materially affecting customer offerings.
"While NBFCs could represent to RBI, we think they could work to redesign such loans to be compliant while retaining product economics and customer offerings," the report noted.
Morgan Stanley said NBFCs are likely to make representations to the central bank, arguing that revolving credit products provide significant flexibility to borrowers while helping minimise overall interest costs. It added that shifting customers entirely to term loans could require them to borrow funds in advance and park the money in savings or current accounts until utilisation, resulting in a "significant negative carry" and higher borrowing costs.
The report also suggested that the impact on individual NBFCs could remain limited if the regulations are implemented uniformly across the industry.
"If implemented consistently as an industry-wide measure maintaining a level playing field, this is less likely to cause disproportionate loss of business or economics at an individual NBFC," Morgan Stanley said.
It further said the effect could be mitigated substantially if the proposed norms apply only to fresh loans while existing revolving credit facilities are grandfathered. According to the report, diversified NBFCs may also be better placed to absorb the impact because they can offer substitute lending products, such as gold loans, while continuing to provide customers with flexible borrowing options.
Morgan Stanley maintained that it will closely monitor industry feedback on the draft as well as the RBI's final guidelines before assessing the eventual implications for the sector.
— ANI
Reader Comments
As a small business owner, I rely on overdraft facilities from NBFCs for my working capital needs. Flexi loans give us breathing room during cash flow gaps. If these are restricted, many MSMEs will struggle. RBI should think about the practical challenges small businesses face before finalising these rules. Hope they consider representations from the industry.
The problem is not the product but the lack of financial literacy. NBFCs have been selling these complex products without explaining the fine print. RBI is right to intervene, but they should also mandate better transparency and customer education. Let's not throw the baby out with the bathwater. 🤔
Morgan Stanley is right that NBFCs can redesign products, but let's not underestimate the impact on smaller NBFCs. The big players have resources to adapt, but smaller ones will bear the brunt. Also, for customers, moving to term loans means borrowing more than needed and paying interest on idle funds - that's just not practical for many households.
Interesting to see how RBI is tightening the screws on NBFCs after the whole Paytm saga. It's good to see the regulator being proactive about consumer protection, but they need to balance it with financial inclusion goals. India's credit market is still developing - over-regulating could stifle innovation. Let's see how the final guidelines pan out.
Just another case of the regulator being reactive rather than proactive. These flexi products have been around for years, and now suddenly RBI decides they're problematic? The real issue is that NBFCs are increasingly lending to subprime borrowers with inadequate checks. Instead of
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