RBI's proposed revolving credit curbs may hit NBFC flexi loans: Morgan Stanley

The Reserve Bank of India's (RBI) draft framework on revolving credit facilities could have significant implications for non-banking financial companies (NBFCs) offering flexi and overdraft loans, according to a Morgan Stanley analysis.

The proposed directions aim to restrict NBFCs from providing revolving credit products, with an exception for entities authorised to issue credit cards. Under the draft, loans would be required to follow a pre-determined amortisation schedule, and sanctioned limits would not be restored or replenished after principal repayments.

Morgan Stanley noted that flexi and overdraft loans in the corporate, MSME, and unsecured personal loan segments are likely to be most affected. However, the brokerage believes the industry has room to adapt its products without materially altering customer offerings.

NBFCs are expected to make representations to the central bank, arguing that revolving credit provides borrowers with flexibility and helps minimise overall interest costs. The report added that shifting customers entirely to term loans could force them to borrow in advance and park funds in savings or current accounts, resulting in a significant negative carry and higher borrowing costs.

The impact on individual NBFCs could remain limited if the regulations are applied uniformly across the industry, maintaining a level playing field. Morgan Stanley also suggested that the effect could be mitigated if the norms apply only to fresh loans, with existing facilities grandfathered.

Diversified NBFCs may be better positioned to absorb the impact by offering substitute products such as gold loans, while still providing flexible borrowing options. The brokerage said it will monitor industry feedback and the RBI's final guidelines before assessing the eventual implications for the sector.