RBI advises NBFCs to curb perpetual credit lines over risk concerns

The RBI has cautioned NBFCs on perpetual credit lines, citing risks of loan evergreening and financial instability, urging lenders to slow down issuance of such flexible credit products

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The Reserve Bank of India (RBI) has raised concerns over the growing use of perpetual credit lines by retail-focused non-banking financial companies (NBFCs), cautioning lenders about potential risks associated with such products, NDTV Profit reported.

 

The central bank has conveyed to some lenders that they should slow down the issuance of these credit lines, which allow borrowers to access funds continuously without a fixed repayment schedule. The RBI is particularly uneasy about lenders extending credit without clear visibility into a borrower’s repayment capacity, raising concerns over financial stability and risk management.  

 

The regulator’s warning comes amid a surge in flexible lending products in the retail segment, which, while providing easy access to credit, could pose risks if not monitored adequately.

 

A perpetual line of credit allows borrowers to access funds up to a predetermined limit, offering flexibility to withdraw as needed. Repayments can be made partially or in full based on cash flow, and borrowers may continue paying interest without the account being classified as a non-performing asset.

 

The concern is that borrowers might use available credit lines to repay existing dues, effectively recycling debt. The RBI believes such perpetual credit structures could lead to the evergreening of loans, according to sources cited by NDTV Profit.  

 

These loans resemble cash credit facilities provided by banks, which NBFCs are not authorised to offer. Borrowers typically include salaried individuals, small business owners, and self-employed professionals.  

 

The Economic Times earlier reported the RBI’s concerns, stating that NBFCs have extended loans worth approximately Rs 50,000 – 60,000 crore under such arrangements.  

 

The RBI has previously raised similar concerns about fintech-led rollover credit products. In 2022, it restricted fintechs from issuing prepaid payment instruments marketed as credit card alternatives. These cards were linked to credit lines, allowing borrowers to roll over debt by paying interest, with repayment terms remaining flexible.