New Delhi [India], August 11 : The Reserve Bank of India's (RBI) proposed restrictions on revolving credit facilities offered by non-banking financial companies (NBFCs) may increase operational challenges for lenders, reduce their returns and raise costs for borrowers, Kotak Institutional Equities said in a report.
The brokerage expects NBFCs to gradually shift from flexi/revolving credit facilities to bullet-repayment loans following the RBI's proposal to allow only term loans with fixed repayment schedules.
"Revolving/flexi may be looked at as more of a payment term than a loan facility in itself," Kotak said.
NBFCs mainly offer these facilities to micro, small and medium enterprise (MSME) borrowers across secured loans, loan against property (LAP), unsecured loans, supply-chain finance and working-capital loans. Some lenders also provide such facilities for personal and professional loans.
According to Kotak, flexi/revolving facilities allow borrowers to draw funds according to their requirements and match repayments with business cash flows. Once repaid, the loan can be drawn again without fresh documentation, offering greater convenience to borrowers. Lenders typically earn a premium of 50-100 basis points compared with bullet-repayment loans.
The report said the proposed changes are unlikely to lead to major borrower losses for NBFCs, as customer relationships depend on several factors, including interest rates, ease of transactions, servicing quality, dependence and flexibility.
"While the treatment of the existing revolving credit book is unclear, we expect the regulator to exempt the same or provide sufficient time to convert to bullet repayment loans," Kotak said.
Kotak expects lenders to migrate flexi/revolving facilities to bullet-repayment loans. While banks may gain some advantage in segments where they compete directly with NBFCs, the brokerage said the move is likely to result in a shift in market share rather than a significant loss of borrowers for NBFCs.
"We, hence, believe that this ban will, prima facie, lead to a market shift and not to a loss of borrowers," the report said.
The RBI's draft proposal allows NBFCs to offer only term loans, which are disbursed in one or more instalments and repaid through predetermined schedules.
The proposal effectively restricts products where borrowers can repeatedly draw and repay the same credit limit. The central bank has invited comments on the draft until August 28.