What is the Proposed Rule Change?
The RBI has issued draft guidelines proposing that NBFCs should only be allowed to offer term loans. A term loan has a fixed principal amount, a set repayment schedule (either in installments or as a lump sum), and a crucial new condition. The proposed
rule states that once a borrower repays any part of the principal, their sanctioned credit limit cannot be restored or replenished. This effectively bans NBFCs from offering 'revolving credit' facilities, where borrowers can draw, repay, and re-draw funds from a pre-approved limit. The only exception would be for the handful of NBFCs specifically authorised by the RBI to issue credit cards.
The Core Issue: Borrower Limits After Repayment
This brings us to the central question for borrowers. Currently, many popular NBFC products, like 'flexi loans' or digital lines of credit, operate on a revolving basis. A customer with a ₹2 lakh limit might use ₹50,000, repay it, and have the full ₹2 lakh limit available again for future needs. The RBI's proposal would end this. After repaying that ₹50,000, the borrower's total available credit would remain diminished; the limit does not get restored. If they need more funds later, even within their original sanctioned amount, they would likely have to apply for a fresh term loan, adding friction and inconvenience to the process.
Why is the RBI Proposing This?
The regulator's perspective appears to be rooted in financial stability and risk management. Analysts suggest the move is aimed at curbing potential 'evergreening' of loans, where fresh drawdowns from a revolving facility could be used to service existing debt, masking a borrower's true financial stress. By enforcing a fixed amortisation schedule, the RBI can get a clearer picture of repayment behaviour. The move also creates a distinct line between banks, which can offer working capital facilities like overdrafts, and NBFCs, pushing the non-bank sector towards more structured, predictable loan products. The regulator has reportedly been signaling its preference against such products for the last two years.
The Borrower and NBFC Perspective
For millions of individuals and MSMEs, the flexibility of revolving credit is a vital financial tool. These products offer quick access to funds for emergencies or working capital needs without the hassle of a new loan application each time. Industry experts and NBFCs are concerned that a shift to a rigid term-loan-only structure could create a 'significant negative carry' for borrowers. This means they might have to borrow a larger lump sum upfront and park unused funds in a low-interest account, effectively raising their overall borrowing cost. For NBFCs, these flexi-loan products are a key tool for customer acquisition and retention, and the proposed changes could impact loan growth and profitability.
What Happens Next?
It is crucial to remember that these are currently draft proposals. The RBI has invited feedback from stakeholders, including the public and financial institutions, until August 28, 2026. NBFCs are expected to make representations, arguing for the value of flexibility for borrowers. There is also a possibility that the RBI may 'grandfather' existing revolving credit facilities, meaning the new rules would only apply to new loans, limiting immediate disruption. However, if the rules are implemented as proposed, NBFCs will need to redesign their loan products, which could reshape a significant part of the lending landscape for personal and small business loans in India.
