RBI's Directive on NBFCs' Line of Credit
The Reserve Bank of India (RBI) has instructed large finance companies to cease the practice of offering a 'line of credit' to companies. This decision is due to concerns about repayment structures within these credit lines potentially obscuring borrower stress.
Key Concerns
- Disguise of Borrower Stress: The repayment mechanisms may mask financial difficulties faced by borrowers.
- Assessment Disadvantages: Non-Banking Financial Companies (NBFCs) struggle compared to banks in evaluating real-time cash flows of borrowers.
- Borrower Flexibility:
- Borrowers can frequently withdraw and deposit funds within the approved limit.
- Initially, only interest needs to be paid, with principal repayments deferred.
RBI's Position
The RBI has advised NBFCs to avoid renewing this facility after existing agreements conclude. It suggests that such products are more apt for banks, which have better access to real-time borrower cash flow data.
Industry Impact and Response
- Estimated outstanding loans under these credit lines range from ₹50,000 crore to ₹60,000 crore.
- NBFCs are advised not to abruptly cancel current credit limits but to refrain from renewing them.
Reason for Banks' Advantage
- Real-Time Monitoring: Banks have the capability to monitor borrowers' working capital requirements more effectively due to access to real-time cash flows.
- Revolving Facility Comparison: The flexibility of these credit lines is similar to revolving facilities such as cash credit limits offered by banks.
