RBI imposes new limits on revolving credit facilities
Summary
- The RBI has issued a circular restricting the size and tenure of revolving credit facilities (RCF) that banks can extend to borrowers.
- Effective from 1 October 2023, the maximum exposure per borrower is capped at 10% of the bank's total loan portfolio or ₹2 crore, whichever is lower.
- The tenure of an RCF is limited to 12 months and can be extended only with prior approval from the RBI.
- Banks must maintain a 100% risk weight for RCFs, treat them as a distinct product, and disclose the details in their quarterly financial statements.
- The restriction aims to curb the misuse of RCFs for long‑term financing, reduce the build‑up of non‑performing assets and enhance credit discipline.
Key Facts
- · RBI circular on revolving credit issued in August 2023.
- · Maximum RCF exposure: 10% of bank's loan portfolio or ₹2 crore, whichever is lower.
- · Maximum tenure: 12 months, extendable only with RBI permission.
- · Risk weight for RCFs set at 100%.
- · Mandatory quarterly disclosure of RCFs by banks.
- · Objective: Prevent misuse for long‑term financing and contain NPA growth.
Why it matters
Revolving credit is a widely used short‑term financing tool for businesses. By tightening its parameters, the RBI seeks to prevent over‑leveraging, ensure better asset quality in banks, and protect the financial system from credit risk buildup—issues central to India’s macro‑economic stability and monetary policy.
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