Financial Services Sector Update : RBI proposes curbs on revolving credit or flexi loans by PL Capital
Proposed RBI amendments could require NBFCs to redesign existing revolving credit products; we believe diversified NBFCs to be better placed to mitigate disruption through alternative product offerings. Flexi loans contribute ~13% of BAF’s portfolio (largely MSME loans); we expect a small impact on margin due to the loss of flexi premium. Moreover, the MSME segment has seen subdued growth over the past 4-5 quarters due to high stress in the portfolio. We expect recovery to be further delayed due to the new guidelines.
RBI draft has proposed tighter restrictions on the type of credit facilities offered by NBFCs. The draft defines a revolving credit facility as any fund-based credit facility that does not meet the definition of a term loan. A term loan has been defined as a credit facility with a fixed principal amount, where the sanctioned limit is disbursed in one or more instalments and repaid according to a predetermined repayment schedule. The proposal also specifies that once the principal is repaid, the sanctioned limit cannot be restored or replenished. Under the proposal, the restriction would not apply to NBFCs that have been specifically authorised by the RBI to issue credit cards
Flexi/revolving loan structures likely to be impacted:
In our view, any type of reusable credit line, overdraft facility or flexi loan product offered by NBFCs in the corporate, MSME and unsecured personal loan category is likely to be impacted. Proposed RBI amendments would require NBFCs to restructure their existing revolving credit products, with potential implications on customer proposition, fee income and product economics. While the full impact will depend on the final guidelines, diversified NBFCs may be better placed to mitigate disruption through alternative product offerings
Lower yield due to loss of flexi premium:
NBFCs with flexi/revolving structures earn a higher yield (premium of ~50-100 bps). Any migration towards conventional term loans could reduce such fee pools and alter the economics of these products.
NBFCs to lose out on customers vs. banks:
If these restrictions are applied strictly, NBFCs could face a structural disadvantage vs. banks in segments where access to flexible credit is an important customer proposition.
Impact on BAF:
BAF has ~13% of its portfolio (Rs 700 bn) coming from flexi loans across unsecured business loans/ MSME/ PL/ urban and rural B2C loans. These products have a typical tenure of ~4-5 years and are offered to existing BAF customers. Assuming a premium of 100 bps on 13% of its portfolio, we think the impact on margin would be ~13 bps. Moreover, the company has been curtailing growth in the MSME portfolio over the past 4-5 quarters due to higher stress/ over-leveraging in the segment. While Q1FY27 commentary expected a recovery from Q2 onwards, it is likely to be delayed due to the new guidelines.
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