Understanding the NBFC Landscape
Non-Banking Financial Companies are a vital part of India's financial ecosystem. They provide credit to individuals and businesses that may not have access to traditional banks, playing a crucial role in financial inclusion. Over the years, their scale
and interconnectedness with the banking system have grown, prompting the RBI to implement a more robust regulatory framework. This began with the Scale-Based Regulation (SBR) framework in 2021, which categorises NBFCs into different layers based on their size and systemic risk. The latest draft rules are a continuation of this effort to strengthen the sector and reduce potential risks.
The Core Proposal: Term Loans Over Revolving Credit
The most significant change proposed in the RBI's draft amendments is the move to prohibit most NBFCs from offering revolving credit facilities. Under the new rules, NBFCs would be restricted to offering only 'term loans'. A term loan is defined as having a fixed principal amount and a predetermined repayment schedule; once repaid, the credit line is closed and cannot be drawn from again. Any product that doesn't fit this definition, such as those allowing borrowers to draw, repay, and reuse funds within a sanctioned limit, would be classified as a revolving credit facility and disallowed. The only exception would be for NBFCs specifically authorised by the RBI to issue credit cards, as revolving credit is a fundamental feature of that product.
Impact on Popular Loan Products
This proposed change stands to significantly impact a wide range of popular credit products. Many 'flexi loans', digital lines of credit, overdraft-style facilities, and even some 'Buy Now, Pay Later' (BNPL) services are structured as revolving credit. These products are offered to corporate, MSME, and retail customers, providing flexibility that many borrowers value. If the draft rules are finalised, NBFCs will need to redesign these products to comply with the term loan structure. This could make borrowing less convenient for customers who are used to the flexibility of drawing funds as needed without applying for a new loan each time.
Why is the RBI Proposing This Change?
The RBI's primary goal appears to be strengthening financial stability and reducing systemic risk. The regulator has several concerns regarding revolving credit products offered by NBFCs. One key issue is the risk of 'evergreening', where distressed borrowers use fresh drawdowns from their revolving credit line to service existing debt, masking the true health of the loan. Additionally, some digitally accessible revolving facilities function very similarly to credit cards, blurring the lines without the same level of specific authorisation. The RBI also aims to maintain a clear distinction between the lending activities of banks, which traditionally handle working capital and revolving credit, and NBFCs. By pushing NBFCs toward fixed-term lending, the regulator can better assess asset-liability management and reduce liquidity risks in the sector.
Industry Reaction and Potential Hurdles
The announcement of the draft rules sent ripples through the market, with the stock prices of major NBFCs, particularly those with high exposure to flexi-loan products, seeing a decline. While some in the industry noted that the RBI had been signalling its discomfort with these products for some time, the formal proposal has spurred calls for a nuanced approach. Industry bodies are expected to make representations to the RBI, arguing for exemptions, particularly for secured lending and crucial business financing like supply chain finance, which could be negatively affected by a blanket ban. Some analysts believe that diversified NBFCs will be better placed to absorb the impact by shifting customers to other products. The final shape of the rules will depend on the feedback the RBI receives before the August 28, 2026, deadline.
