What is the Proposed Rule?
The RBI has released draft guidelines proposing that NBFCs should primarily offer loans structured as 'term loans'. A term loan has a fixed amount, a set repayment schedule, and a clear end date. The crucial part of the proposal is that once a borrower
repays a portion of the principal, that amount cannot automatically be made available again for the borrower to draw from. This move aims to stop a popular lending model where a repaid amount replenishes the credit limit, allowing for continuous withdrawals under the same loan agreement. The only exception to this proposed rule would be for NBFCs specifically authorised by the RBI to issue credit cards, as revolving credit is an inherent feature of that product.
Understanding 'Flexi Loans' and Revolving Credit
The RBI's proposal directly impacts products often marketed as 'flexi loans' or other forms of revolving credit lines. Unlike a standard term loan, a flexi loan allows a borrower to withdraw funds from a pre-sanctioned limit as needed, repay parts of it, and then withdraw the repaid amount again later without a new application. For example, if you have a ₹5 lakh flexi loan, borrow ₹3 lakh, and then repay ₹1 lakh, that ₹1 lakh becomes available again for you to use. This model offers great convenience to customers and helps NBFCs improve customer stickiness and maintain their loan book size, as customers are more likely to return to an existing, accessible credit line.
Why is the RBI Making This Change?
The central bank's primary objective appears to be promoting greater transparency and discipline in the lending sector. By pushing NBFCs towards a term loan structure, the RBI ensures better visibility into a borrower's actual leverage and repayment behaviour. The revolving nature of flexi loans can sometimes mask underlying financial stress, as borrowers might repeatedly draw down funds to manage cash flows, creating a cycle of continuous debt. The proposed shift to a model where any new requirement for funds necessitates a fresh assessment and a new loan disbursement gives the lender a clearer, more current picture of the borrower's creditworthiness. This aligns with the RBI's broader concerns about the rapid growth of unsecured consumer credit.
The Impact on NBFCs
For NBFCs that have heavily relied on flexi-loan products, this proposal could force a significant redesign of their business models. Companies with a large portion of their assets under management (AUM) in such revolving facilities may face challenges. For instance, reports suggest that revolving credit products could account for a notable share of the portfolios of major players like Bajaj Finance. The rule change could potentially slow down loan growth, as the convenience of repeat borrowing from the same facility would be gone. Lenders would need to make more fresh disbursals to maintain their growth momentum and may see a reduction in fee income associated with these flexible products.
What Does This Mean for Borrowers?
For borrowers, the change is a double-edged sword. On one hand, it introduces more discipline into borrowing. A fixed repayment schedule makes it easier to track debt and plan finances, reducing the risk of falling into a debt trap where the principal amount never seems to decrease. On the other hand, it removes the convenience and flexibility that made these products popular. If a borrower needs additional funds, they would have to go through the process of applying for a new loan, which involves a fresh assessment and potentially more paperwork. This added friction might make accessing quick credit more difficult for some individuals and small businesses.
The Road Ahead
It is important to remember that these are currently draft guidelines. The RBI has invited feedback from stakeholders, including NBFCs and the public, until August 28, 2026. Based on the feedback, the central bank may implement the rules in their current form or make modifications. The industry's response will be crucial in shaping the final regulations. While the move signals the RBI's intent to tighten oversight, NBFCs will likely adapt by redesigning their products to comply with the new framework while still meeting customer demand for credit. The underlying need for credit doesn't disappear, but the way it is delivered is set to become more structured and transparent.
