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The Reserve Bank of India's (RBI) draft directions proposing restrictions on revolving credit facilities offered by non-banking financial companies (NBFCs) could affect flexi and overdraft loan products across corporate, MSME and unsecured personal loan segments, according to a Morgan Stanley report.

The report said the RBI's draft framework seeks to restrict NBFCs from offering revolving credit products, except for entities authorised to issue credit cards.

Under the proposal, loans would need to follow a pre-determined amortisation schedule, while sanctioned limits would not be restored or replenished after principal repayments.

Potential Impact on Loan Segments

"We think flexi and overdraft loans by NBFCs operating in corporate, MSME and unsecured personal loan segments, are likely to be impacted," Morgan Stanley said in the report.

Scope for Adaptation and Mitigation

Despite the proposed restrictions, the brokerage believes the industry has scope to adapt its products without materially affecting customer offerings. "While NBFCs could represent to RBI, we think they could work to redesign such loans to be compliant while retaining product economics and customer offerings," the report noted.

Morgan Stanley said NBFCs are likely to make representations to the central bank, arguing that revolving credit products provide significant flexibility to borrowers while helping minimise overall interest costs. It added that shifting customers entirely to term loans could require them to borrow funds in advance and park the money in savings or current accounts until utilisation, resulting in a "significant negative carry" and higher borrowing costs.

The report also suggested that the impact on individual NBFCs could remain limited if the regulations are implemented uniformly across the industry. "If implemented consistently as an industry-wide measure maintaining a level playing field, this is less likely to cause disproportionate loss of business or economics at an individual NBFC," Morgan Stanley said.

It further said the effect could be mitigated substantially if the proposed norms apply only to fresh loans while existing revolving credit facilities are grandfathered.

According to the report, diversified NBFCs may also be better placed to absorb the impact because they can offer substitute lending products, such as gold loans, while continuing to provide customers with flexible borrowing options.

Morgan Stanley maintained that it will closely monitor industry feedback on the draft as well as the RBI's final guidelines before assessing the eventual implications for the sector. (ANI)