The Reserve Bank of India (RBI) has directed large non-banking financial companies (NBFCs) to stop and not to renew the practice of extending 'line of credit' to companies over concerns that the structure of repayment in these advances often disguise the stress faced by the borrower, The Economic Times reported.
A line of credit is a flexible loan from a bank or financial institution. Similar to a credit card with a set credit limit, a line of credit is a defined amount of money that you can access as needed and use as you wish. Then, you can repay what you used immediately or over time.
RBI officials proposed these curbs during a recent one-on-one interaction with NBFCs, the report added.
On March 5, Bajaj Finance shares were trading over 3% lower at Rs 8,221 apiece.
Moneycontrol couldn't independently verify the report.
Why the curb?
Lines of credit are usually provided to individuals or small business owners. This product enables the borrower to withdraw funds as many times from the amount limit and deposit it back in their loan amount whenever they have surplus money.
Now, in an ideal situation the lender assumes the borrower will use its cash flow to service the debt. But, RBI is concerned that since the borrower does not have a fixed repayment structure, the borrower might take a part of the loan and service it by making other draw down loans, the report added.
Hence, the repayment ability of the borrower or the stress in servicing the debt will be known after a lag, mostly when the sanctioned loan is completely drawn down, the report further said.
Also read | NBFCs cheer RBI's move to reverse higher risk weights, but analysts don't see aggressive lending just yet
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