Understanding the Core Proposal
In early August 2026, the RBI released a draft proposal suggesting that NBFCs should primarily offer 'term loans' and be barred from providing 'revolving credit facilities'. The only exception would be for NBFCs specifically licensed to issue credit cards,
as revolving credit is fundamental to how credit cards operate. This move is designed to create a clearer distinction between different types of loans and strengthen regulatory oversight in the rapidly growing NBFC sector. The central bank has invited feedback from stakeholders on these draft amendments until August 28, 2026, after which it will issue final guidelines.
Term Loan vs. Revolving Credit Explained
So, what's the difference? A term loan is what most people traditionally think of as a loan: you borrow a fixed amount of money and repay it in scheduled instalments over a set period. Crucially, under the RBI's proposed definition, once you repay a portion of the principal, that part of the credit line is closed. You cannot draw that money again. In contrast, a revolving credit facility works like a flexible credit line. Imagine you have a sanctioned limit of ₹5 lakh. You might use ₹2 lakh, repay ₹1 lakh, and then be able to borrow that ₹1 lakh again without a new application. This is the model used by many popular 'flexi-loan' products.
The Impact on 'Flexi-Loans'
This proposal directly targets the structure of popular products like 'flexi-loans' or digital credit lines offered by many leading NBFCs. These products have been successful precisely because of their convenience; they allow borrowers to use, repay, and reuse funds within an approved limit, acting as a sort of overdraft facility. If the new rule is implemented, NBFCs will have to restructure these products. Instead of a single, reusable credit line, a borrower might need to apply for a new term loan each time they need additional funds, even if they have a good repayment history. This could reduce the convenience and repeat business that has fueled growth for many lenders.
The Borrower's Perspective
For borrowers, this change is a mixed bag. On one hand, the convenience of a revolving credit line will diminish. On the other, the shift towards structured term loans brings greater clarity. With a term loan, your repayment schedule and total outstanding principal are always clear, which can make financial planning easier and prevent the risk of falling into a cycle of continuous borrowing. The RBI's intention appears to be to protect consumers by ensuring loan products are transparent and their structures are not overly complex or similar to credit cards, which are regulated differently.
A Broader Pro-Borrower Trend
This proposal fits into a larger trend of the RBI making lending more transparent and borrower-friendly. For years, banks were not allowed to charge prepayment penalties on floating-rate loans to individuals, but NBFCs often did. In a separate but related move, the RBI has been standardising these rules. Recent directives, set to be effective from January 1, 2026, bar NBFCs from levying foreclosure or prepayment charges on floating-rate term loans given to individual borrowers for non-business purposes. This allows borrowers to repay their loans early, either partially or in full, without facing a penalty, giving them more flexibility to manage their debt.
