RBI’s restrictions on revolving credit | Explained
The Reserve Bank of India is expressing concern over the risks associated with revolving credit, a tool vital for rural financial inclusion. While it helps farmers manage seasonal income fluctuations, the RBI is wary of rising debt recycling and potential systemic risks.
Why it matters
It highlights the tension between promoting financial inclusion for the rural poor and maintaining macroeconomic stability in the banking sector.
Revolving credit, one of India’s finest tools for financial inclusion, has made deep inroads in creating sustainable rural wealth. Still, rising risks of debt recycling have made the Reserve Bank of India (RBI) sceptical.
For rural India, where income is mainly seasonal and contributes 46% to 50% of gross domestic product, revolving credit became an important component and shield against financial shocks as well as informal loan sharks.
Structural rigidity in the formal credit framework led to mismatch in cash-flow needs of farmers, who incur expenses on seeds, fertilisers, labour and irrigation months ahead of income stream after harvest. Revolving credit bridges this gap by providing liquidity as required.
This led to the emergence of Kisan Credit Card (KCC), overdraft facilities, self-help group (SHG) credit lines, microfinance-linked loans and of late increasingly digital credit products (which is now a cause of concern).
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