RBI proposes a draft that removes on-demand loans by NBFCs. Means: No more overdraft like facility from NBFCs. This is important, because NBFCs could take security (like stocks, mutual funds etc) and give people a loan facility that behaves like a bank overdraft. Meaning, you get a facility for 50 lakh, and you can draw any amount, say 10 lakh for a few days, repay it back, then take it again etc. You get charged interest only for the time that you have taken money, but the facility itself lasts a year or more, so you can do this many times over. Effectively, it's on-demand credit repayable anytime, without new loan agreements each time This is a great facility, mostly because it can be used for temporary liquidity in a very short period of time, without needed to sell the stock or mutual funds you own. Now, if RBI's rules go through, only banks can do this. For you and me, this is a no brainer; banks have a 1 cr. limit on such overdrafts against securities. It hurts those that use such facilities to borrow more (only NBFCs can give higher value loans than 1 cr). By restricting this to only banks - it will massively reduce the playing field for such loans. And it will have to change the business model for loan-against-mutual-funds startups to move to pure term loans (fixed term loans, repayable in EMI or bullet, no repeated taking of loan once returned) Since this is an on-demand loan, the section pertaining to "demand/call loans" goes away. Meaning no loans that are flexible repayment whenever you want, etc. This still leaves some hope - that if you need money, you can quickly digitally get a loan, with a digital pre-approval perhaps. But it has to have a fixed tenure and repayment plan, with perhaps a zero prepayment penalty. (Or just use a bank) Also this hurts NBFCs that might on-lend to other NBFCs by taking securities as collateral. Don't know the impact of this yet. I think it's a little regressive, this rule. Perhaps they could restrict the scale of this to say 5 cr. per borrower instad of removing it outright from NBFCs. Banks need competition to do better for customers.
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