Understanding the Proposed Rule
The Reserve Bank of India (RBI) has released draft amendments targeting how NBFCs structure their loans. The proposal, open for feedback until August 28, 2026, aims to restrict most NBFCs to offering only 'term loans'. This is a significant shift away
from the flexible, revolving credit facilities that have become popular. A term loan has a fixed principal, a clear repayment schedule, and a definite end date. The core of the new proposal is a clause stating that once a part of the principal is repaid, that amount cannot be made available for the borrower to draw from again. This move is designed to bring more clarity and structure to NBFC lending, aligning it more closely with traditional banking practices.
Term Loans vs. Revolving Credit
To grasp the impact of this proposal, it’s crucial to understand the difference between the two lending models. Imagine a term loan as a one-way street: you receive a sum of money and pay it back in instalments over a set period. Once a payment is made, that part of the loan is considered closed. In contrast, a revolving credit facility, such as a 'flexi loan', is more like a two-way street. If you have a sanctioned limit of ₹5 lakh and borrow ₹3 lakh, your available credit is ₹2 lakh. If you then repay ₹1 lakh, a revolving facility would replenish your available credit, allowing you to borrow that ₹1 lakh again without a new application. The RBI's new proposal seeks to end this revolving door for most NBFC loans, except for those specifically licensed to issue credit cards.
The 'Fresh Credit' Clarification
The headline's focus on "repaid amounts not becoming fresh credit" gets to the heart of the RBI's intent. Under many existing 'flexi' or revolving loan products, a part-repayment reduces the outstanding balance but simultaneously increases the available credit limit for the borrower to use again. This can be convenient for borrowers but creates a continuous cycle of debt that can lack the clear end-date of a term loan. By mandating that NBFC loans operate as term loans, the RBI is ensuring that a repayment is treated strictly as a reduction of debt. The repaid principal will not automatically replenish the credit line, preventing it from becoming 'fresh credit' that can be re-borrowed instantly. This ensures that every rupee repaid definitively goes towards closing the loan.
What This Means for Borrowers
For customers, this proposed change brings both pros and cons. The primary benefit is increased transparency and financial discipline. With a term loan structure, borrowers have a clear amortization schedule and a definite timeline for when their loan will be fully paid off. This prevents the ambiguity of revolving credit, where the total interest paid over time can be harder to track. However, it also reduces flexibility. Borrowers who rely on the ability to draw and repay funds as needed from a pre-sanctioned limit will find their options limited. Needing additional funds would require a new loan assessment rather than a simple redraw from an existing facility. This could add friction and inconvenience for those who use these products for managing fluctuating cash flow needs.
Impact on NBFCs and the Lending Market
NBFCs, particularly those like Bajaj Finance which have popularised flexi-loan products, will be most affected. These products have been key drivers of customer stickiness and growth, as the convenience encourages repeat borrowing. The proposed shift to term loans could slow down loan book growth and reduce fee income associated with these flexible products. However, the change is part of a broader RBI push for responsible lending and greater stability in the financial sector. By standardising loan structures, the regulator aims to get a clearer picture of underlying borrower stress and ensure that lending practices across the board are transparent and fair. This move could level the playing field between banks and NBFCs, fostering healthier competition based on clear and comparable products.
