RBI asks shadow banks to give information on supply-chain financing

NBFCs may have to rework credit service typically used by small businesses

The Reserve Bank of India (RBI) has sought details on supply-chain finance offers of non-banking financial companies (NBFCs).

 

Industry sources said the RBI’s Department of Super­vision (DoS) has told a few leading shadow banks that they may have to rework these offers.

 

Supply-chain finance is extended by NBFCs as term loans typically ranging between 30 days and 180 days with each tranche a distinct term loan in itself within the overall credit limit determined by an NBFC of a borrower. These facilities are mostly taken by micro, small, and medium enterprises (MSMEs) with seasonal or cyclical businesses from NBFCs for their peak credit requirements or short-term liquidity needs to the extent not catered to by banks.

 

MSMEs are not capital-intensive businesses but are in need of working capital. Banks in general provide working capital in the form of revolving credit lines such as cash credit or overdraft facilities to such entities, based upon past financial data and on the basis of assessed average working capital requirements.

 

It has been gathered that the Finance Industry Development Council (FIDC) has raised the issue with the RBI and stated that these offers help MSMEs to compete with bigger players, which have well-established lines of credit from larger financial institutions, and enables MSMEs to expand their businesses, which also supports smaller businesses which do not have direct access to procurement or the marketplace.

 

The FIDC, which is a trade body of NBFCs and aspires to self-regulatory organisation status, has contended that these arrangements are not akin to revolving facilities under credit cards for which a separate mechanism has been provided in the NBFC master directions.

 

Credit cards allow for purchases even when the amount is overdue or delinquent upon payment of just 5 per cent of the outstanding amount. 

 

This is not the case with supply-chain finance lines extended by NBFCs where delinquencies and overdue amounts are closely monitored and new credit is held back on signs of stress. Each tranche is monitored for overdue and even if a single tranche becomes delinquent and 

 

not repaid as scheduled, the entire credit exposure becomes delinquent. There is no facility to just service interest or pay a part of the due and roll over the balance.

 

Talking points 

> Supply-chain finance is extended by NBFCs as term-loans typically ranging between 30-180 days

> Each tranche is a distinct term-loan in itself within the overall credit limit determined by an NBFC of a borrower

> These facilities are mostly availed of by MSME with seasonal or cyclical businesses for peak credit requirements or short-term liquidity needs

> Finance Industry Development Council has raised the issue with the banking regulator and sought a meeting