What is the Proposed Change?
The RBI has released draft amendments suggesting that NBFCs should primarily offer only 'term loans'. This move would prohibit them from offering 'revolving credit facilities'. The draft, released on August 6, 2026, introduces formal definitions for both
types of credit for the first time, aiming to bring more clarity to the sector. A term loan is defined as a loan with a fixed principal amount and a pre-decided repayment schedule. Once any part of the principal is repaid, the borrower cannot draw that amount again. Any product that doesn't fit this description is considered revolving credit, which the RBI wants to restrict. The public and industry stakeholders have been invited to provide feedback on these proposals until August 28, 2026.
Why is the RBI Making This Change?
The primary goal is to enhance regulatory oversight and mitigate systemic risks. The RBI aims to create a clear distinction between the lending functions of banks and NBFCs, suggesting that working capital finance should predominantly be handled by the banking sector. Analysts believe the move is intended to curb the risk of 'evergreening', where borrowers might use fresh drawdowns from a revolving facility to service existing debt rather than using genuine cash flows. By enforcing a term loan structure, the regulator can get a clearer picture of a borrower's leverage and ensure better asset-liability management by the NBFCs themselves. This isn't a sudden move; the RBI has reportedly been discouraging NBFCs from using these facilities for the past two years.
Impact on NBFCs and Their Products
The impact could be significant, especially for NBFCs that heavily rely on flexible loan products. Popular 'flexi loans', overdraft facilities, and digital credit lines that allow customers to draw, repay, and redraw funds will be affected. Lenders in the corporate, MSME, and unsecured personal loan segments are likely to see the most disruption. Companies may need to completely redesign their loan products to be compliant, which involves operational and system-level changes. Following the announcement, stock prices of major NBFCs, particularly those known for their flexi-loan products, saw a decline as investors assessed the potential impact on growth and profitability.
Are There Any Exemptions?
Yes, the draft rules provide a crucial exemption. NBFCs that are specifically authorised by the RBI to issue credit cards will be allowed to continue offering revolving credit. This is because revolving credit is an inherent and fundamental feature of how credit cards work. Currently, very few NBFCs, such as SBI Card and BoB Cards, hold this authorisation. Bullet repayment loans have also been kept outside the ambit of this specific proposal. The industry is expected to make representations to the RBI, possibly arguing for exemptions for other specific use cases like secured lending or supply chain finance.
What This Means for Borrowers
Borrowers who rely on the flexibility of revolving credit lines from NBFCs, including many 'Buy Now, Pay Later' (BNPL) products, might see these options disappear or transform. The convenience of being able to access funds repeatedly from a pre-sanctioned limit without a new application process will likely be curtailed. Instead, if a borrower needs additional funds after repaying a part of their loan, they might have to go through a fresh assessment for a new term loan. While this enhances financial discipline, it could reduce the ease of access to credit for individuals and small businesses that use these flexible products to manage their cash flow.
