RBI directs Major NBFCs to cease New Lines of Credit and Renewals

The Reserve Bank of India (RBI) has directed large non-banking financial companies (NBFCs) to discontinue and not renew the practice of extending ‘lines of credit’ to companies, citing concerns that the repayment structure in these advances frequently masks the borrower’s stress, according to a report.

A bank or financial institution provides a flexible loan known as a line of credit. A line of credit, like a credit card with a fixed credit limit, is a set amount of money that you can access and use as you see fit. Then you can reimburse what you used right away or over time.

The RBI officials proposed these limitations during a recent one-on-one meeting with NBFCs, according to the report.

Bajaj Finance shares were trading 0.20% upper at Rs.8,420.40 per share on March 6.

Why this Limitation?

Lines of credit are usually provided to individuals or small business owners. This product enables the borrower to withdraw funds as many times from the amount limit and deposit it back in their loan amount whenever they have surplus money.

Now, in an ideal situation, the lender assumes the borrower will use its cash flow to service the debt. But the RBI is concerned that since the borrower does not have a fixed repayment structure, the borrower might take a part of the loan and service it by making other drawdown loans, the report added.

As a result, the borrower’s repayment ability or stress in repaying the debt will be recognised after a period of time, typically when the sanctioned loan is fully paid down, the report further said.