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Large NBFCs are instructed by the RBI to halt new loan lines and renewals.

Richa Pandey
06 Mar, 2025

In a significant move aimed at bolstering financial stability, the Reserve Bank of India (RBI) has directed large non-banking financial companies (NBFCs) to cease issuing new lines of credit and renewing existing ones. This directive stems from concerns that the flexible repayment structures of these credit facilities may obscure the true financial stress of borrowers, potentially leading to systemic risks within the financial sector.

Understanding the RBI's Directive

The RBI's recent mandate specifically targets the practice of offering 'lines of credit'—customized, working capital-like debt facilities that provide borrowers with the flexibility to withdraw funds as needed, up to a pre-approved limit, and repay based on their cash flow situations. Typically extended to self-employed individuals and small businesses, these credit lines allow borrowers to pay only the interest component during the initial period, with principal repayments deferred to a later date.

While such arrangements offer flexibility, the RBI is concerned that the absence of fixed repayment schedules can mask a borrower's actual repayment capacity. This opacity makes it challenging for lenders to assess real-time cash flows and financial health, potentially leading to the evergreening of loans—a practice where new loans are issued to enable borrowers to repay existing ones, thereby concealing defaults.

Implications for Large NBFCs

The RBI's directive is poised to have a profound impact on large NBFCs, particularly those with substantial portfolios of such credit lines. By halting the issuance and renewal of these facilities, NBFCs may need to reassess their lending strategies and product offerings. This shift could lead to a tightening of credit availability for certain borrower segments, especially small businesses and self-employed individuals who often rely on these flexible credit options.

Moreover, NBFCs will need to enhance their risk assessment frameworks to ensure that credit products align with regulatory expectations and accurately reflect borrowers' repayment capacities. This may involve adopting more stringent credit appraisal processes and monitoring mechanisms to mitigate potential risks associated with flexible credit structures.

Broader Context and Regulatory Landscape

The RBI's directive is part of a broader effort to strengthen regulatory oversight and ensure the stability of the financial system. In recent years, the central bank has implemented various measures to tighten lending norms, particularly concerning personal loans, credit card debt, and credit to NBFCs. These measures have contributed to a deceleration in loan growth, with bank credit increasing by 12.5% year-on-year in January 2025, down from 16.1% in January 2024.

Additionally, the RBI has taken action against non-compliant lenders. In October 2024, it barred four NBFCs from issuing new loans due to improper pricing practices and high mark-ups over their funding costs. These actions underscore the central bank's commitment to enforcing fair and transparent lending practices to maintain financial stability.

Potential Impact on Borrowers

For borrowers, particularly small businesses and self-employed individuals, the RBI's directive may limit access to flexible credit options. These borrowers might need to seek alternative financing arrangements, which could come with more rigid repayment terms or higher costs. Consequently, there may be an increased demand for traditional term loans or other credit products with fixed repayment schedules.

Future Outlook

The RBI's move reflects a proactive approach to mitigating potential risks associated with flexible credit structures. By curbing practices that could obscure borrower stress, the central bank aims to enhance transparency and ensure the robustness of the financial system. NBFCs, in response, will need to adapt their business models and lending practices to align with the evolving regulatory landscape, thereby contributing to the overall health and stability of the financial sector.

In summary, the RBI's directive to large NBFCs to halt new lines of credit and renewals signifies a critical step toward strengthening financial oversight and safeguarding economic stability. As the financial ecosystem adjusts to these changes, both lenders and borrowers will need to navigate the evolving landscape with prudence and adaptability.