What Are the New Draft Rules?
The RBI has released draft directions that could fundamentally alter how NBFCs lend money. The proposal suggests that NBFCs should only be allowed to offer 'term loans'. A term loan is defined as having a fixed amount and a predetermined repayment schedule;
once you repay part of the loan, you cannot draw that money again. Any credit facility that doesn't meet this strict definition would be classified as 'revolving credit' and would be prohibited for NBFCs. This rule effectively targets products like flexi loans, overdraft facilities, and various digital credit lines where borrowers can repeatedly draw and repay funds up to an approved limit. The only exception would be for NBFCs specifically authorised to issue credit cards, as revolving credit is a core feature of that product.
The Regulator's Stability Concern
The central bank's primary motivation appears to be curbing risk and enhancing regulatory oversight. Analysts suggest the move is aimed at preventing 'evergreening', a practice where borrowers use fresh drawdowns from a revolving facility to service existing debt, rather than using genuine cash flow. This can mask underlying financial stress for both the borrower and the lender, creating systemic risk. By pushing for fixed-term loans, the RBI wants every new disbursal of funds to be based on a fresh assessment of the borrower's financial health. This brings more discipline and transparency to the lending process, preventing the build-up of leveraged positions that could become unstable in an economic downturn.
The Core Dilemma: Choking Off Credit
While the RBI's intentions are rooted in financial prudence, the industry's main concern is that these rules could severely restrict access to credit for millions. NBFCs have become the lifeblood of credit for many individuals, MSMEs, and self-employed professionals who value the flexibility that banks often don't provide. Flexi loans are popular because they allow borrowers to manage their cash flow efficiently, drawing funds only when needed and minimizing interest costs. Forcing these borrowers into a rigid term loan structure could mean they have to borrow larger sums upfront and incur higher costs. For NBFCs, these products are key to customer retention and growth. The fear is that a blanket ban will not only hurt their business models but also cut off a vital, flexible funding source that fuels economic activity.
The Ripple Effect on Borrowers and Businesses
The immediate impact will be felt by NBFCs, some of whose share prices tumbled after the proposal was announced, but the ripple effects could touch a wide range of borrowers. Many popular 'Buy Now, Pay Later' (BNPL) apps and digital lending platforms are powered by revolving credit lines from NBFCs. The draft rules could force a complete redesign of these popular products. For MSMEs that rely on NBFC overdraft facilities for working capital, the alternative may be to approach traditional banks, which might be less nimble. This could weaken the competitive position of NBFCs and reduce choice for small businesses. Industry bodies are now preparing to make representations to the RBI, arguing for a more nuanced approach that differentiates between unsecured personal loans and secured business lending.
Finding the Right Balance
The proposals are currently in a draft stage, and the RBI has invited feedback from stakeholders until August 28, 2026. This opens a window for dialogue. NBFCs are expected to argue for exemptions, particularly for secured lending and supply chain finance, where the risks are different from unsecured personal loans. Another potential compromise could be 'grandfathering' existing revolving credit facilities, meaning the new rules would only apply to fresh loans. The challenge for the RBI is to find a middle path that achieves its goal of strengthening the financial system without stifling the credit growth that India needs. The final guidelines will determine whether millions of borrowers retain access to the flexible credit they depend on, or if the tap is about to be tightened significantly.
