What Are the Proposed Changes?
The Reserve Bank of India (RBI) has released draft amendments that would require Non-Banking Financial Companies (NBFCs) to exclusively offer term loans. This means loans would have a fixed amount and a pre-determined repayment schedule. Once any part
of the loan is repaid, the borrower cannot draw that amount again. This move effectively prohibits NBFCs from offering revolving credit facilities, such as 'flexi loans' or overdraft-style products, where borrowers can repeatedly draw, repay, and reuse funds up to an approved limit. The only exception would be for NBFCs specifically authorised by the RBI to issue credit cards, as revolving credit is a core feature of that product.
Why Is the RBI Making This Move?
The primary driver behind these proposed rules is to curb the risks associated with "evergreening" of loans. Evergreening is a practice where a borrower uses fresh funds from the same credit line to service their existing debt, rather than using their actual income or cash flow. This can mask the true stress in a loan portfolio and create a dangerous debt spiral for the borrower. Analysts note that unlike banks, NBFCs often have less visibility into a borrower's operational cash flows, making it harder to detect such practices. By restricting lending to structured term loans, the RBI aims to enforce greater credit discipline, enhance transparency, and ensure that loan repayments reflect genuine financial capacity.
How This Affects Borrower Access to Credit
The proposed ban on revolving credit presents a classic trade-off between financial stability and credit flexibility. For many individuals and small businesses, NBFC flexi-loans and credit lines are a vital source of working capital and emergency funds. These products offer the convenience of accessing cash as needed without having to apply for a new loan each time. The new rules could make it harder for these borrowers to manage short-term liquidity needs. If forced to take out fixed-term loans, they might have to borrow larger amounts than immediately necessary, potentially incurring higher interest costs on idle funds. This could particularly impact self-employed professionals and MSMEs who rely on flexible credit to manage uneven cash flows.
The Impact on Popular Lending Products
Several popular lending products stand to be significantly impacted if the rules are implemented as drafted. This includes many 'Buy Now, Pay Later' (BNPL) services, which often rely on a revolving credit line provided by an NBFC partner. Digital credit lines offered by fintech apps, personal flexi-loans used for retail consumption, and working capital loans for MSMEs structured as overdrafts would all need to be redesigned or discontinued. Companies with high exposure to these products, such as Bajaj Finance and Tata Capital, have seen their stock prices react to the news, as investors weigh the potential impact on loan growth and profitability.
What Happens Next?
It is crucial to remember that these are currently draft proposals. The RBI has invited comments and feedback from stakeholders, including NBFCs and the public, until August 28, 2026. The industry is expected to make representations to the central bank, arguing for the importance of flexible credit products for certain borrower segments. Some experts suggest that a middle ground could be found, such as 'grandfathering' existing loans (allowing them to continue under old rules) or creating specific exemptions for certain types of secured or business-related credit. The final guidelines will likely consider this feedback as the RBI balances its goal of financial prudence with the credit needs of the economy.
