The New Blueprint: Term Loans Only
The RBI has proposed a significant shift in how Non-Banking Financial Companies (NBFCs) can lend money. In early August 2026, the central bank released draft amendments proposing that NBFCs should only offer credit products that are structured as 'term
loans'. This effectively bars them from offering 'revolving credit' facilities. The only exception to this rule would be for NBFCs that are specifically authorised by the RBI to issue credit cards, a product where revolving credit is an intrinsic feature. This move signals a major potential change for the numerous NBFCs and fintech firms that offer flexible credit products.
Defining the Difference: Term vs. Revolving
For the first time, the RBI has formally defined what constitutes a 'term loan' versus 'revolving credit' in this context. A term loan is defined as a credit facility with a fixed sanctioned amount that is repaid on a pre-determined schedule. Crucially, once any part of the principal is repaid, the credit limit cannot be restored or replenished for the borrower to use again. In contrast, any facility that doesn't meet this strict definition is considered revolving credit. This includes popular products like flexi loans or digital lines of credit, where borrowers can repeatedly draw, repay, and reuse funds within their approved limit.
Why Target Repeat Borrowing?
The regulator's focus seems to be on increasing transparency and curbing potential risks associated with unstructured, repeated borrowing. Analysts suggest the move is aimed at preventing 'evergreening' of loans, where fresh drawdowns might be used to service existing debt rather than reflecting genuine economic activity. By enforcing a term-loan structure, every new requirement for funds would essentially need a fresh credit assessment and a new loan disbursement. This provides regulators with better visibility into a borrower's total leverage and ensures greater credit discipline from both the lender and the borrower. While convenient for customers, the flexibility of revolving credit can sometimes mask underlying financial stress.
The Impact on Borrowers and Lenders
If implemented, these rules will have a significant impact. For borrowers, especially small businesses and individuals who rely on the flexibility of NBFC credit lines for working capital or emergencies, accessing funds could become more cumbersome. Instead of instantly drawing from an approved limit, they may need to apply for a new loan each time. For NBFCs, the business model for a substantial part of their portfolio could be upended. Companies with high exposure to flexi-loan products saw their stock prices fall following the announcement. Lenders will need to redesign their products, which could affect customer acquisition, loan growth, and the higher fee income often associated with these flexible products.
What Happens Next?
It is critical to remember that these are currently draft proposals. The RBI has invited feedback and comments from stakeholders, including NBFCs and the public, until August 28, 2026. NBFCs are expected to make representations, arguing that their revolving products offer valuable flexibility to borrowers and help minimise interest costs. The final guidelines will likely consider this industry feedback. However, the direction of regulatory intent is clear: to create a more structured and less ambiguous lending framework for the non-banking sector. The final shape of these rules will determine the future of popular credit products and the ease with which many Indians borrow.
