What are Flexi Loans and Why Are They Popular?
Many NBFCs offer a product commonly known as a 'flexi loan' or a revolving line of credit. Unlike a standard term loan where you get a lump sum and pay it back in fixed EMIs, a flexi loan gives you a sanctioned credit limit. You can withdraw funds as needed,
up to that limit, and pay interest only on the amount you use. The biggest convenience is that as you repay the principal, your available credit limit is automatically restored. For instance, if you have a ₹5 lakh limit, borrow ₹2 lakh, and then repay ₹1 lakh, that ₹1 lakh once again becomes available for you to borrow without a new application. This flexibility has made these products extremely popular for managing fluctuating cash flow needs, for both individuals and small businesses.
The RBI's Proposed Change: An End to Automatic Restoration
The RBI has released draft guidelines that aim to change this fundamentally. The proposal suggests that NBFCs should primarily offer loans structured as 'term loans'. A term loan is defined as having a fixed principal amount and a pre-determined repayment schedule. Crucially, under this proposed rule, once a borrower repays part of the principal, that amount cannot be automatically added back to the available credit limit. If you need more funds, even after repaying a portion of your loan, the lender would likely need to conduct a fresh assessment before disbursing more money. This move effectively prohibits NBFCs from offering the revolving credit facilities that define flexi loans, unless the NBFC is specifically authorised to issue credit cards.
Why is the RBI Making This Proposal?
While the RBI hasn't explicitly detailed every reason, the move is seen as a step towards enhancing regulatory oversight and protecting consumers. By pushing NBFCs towards a term loan structure, the regulator gets a clearer picture of the total outstanding debt and repayment behaviour. Some analysts believe the intent is to curb potential risks associated with easy, repeated borrowing, which can sometimes lead to debt cycles for consumers who rely on revolving credit to manage finances. It also brings more uniformity to the lending landscape, making loan products from NBFCs more comparable to those from traditional banks and preventing the 'evergreening' of loans where fresh credit is used to pay off old dues.
How This Will Affect Borrowers
If implemented, this rule will have a direct impact on borrowers who rely on the flexibility of these loans. The primary change will be a loss of convenience. Needing to re-apply or go through a fresh assessment for additional funds introduces friction into the borrowing process. This could make it harder for small business owners or individuals to manage short-term cash flow gaps. Shifting to a term loan structure might mean borrowers have to anticipate their needs and borrow a larger sum upfront, potentially paying interest on funds they don't immediately need. This could lead to higher overall borrowing costs for the customer.
Impact on NBFCs and the Lending Market
For NBFCs, especially those with a significant portfolio of flexi-loan products, the change could be disruptive. These products are key for customer acquisition and retention; the convenience encourages borrowers to stick with the same lender. The proposed rule could reduce repeat borrowing, impact fee income generated from multiple drawdowns, and potentially slow down the growth of their loan books. Some of the largest players in the market, like Bajaj Finance, have a notable exposure to these revolving credit products. Lenders will likely need to redesign their loan offerings to be compliant while trying to retain their customer base.
What Happens Next?
It's important to remember that these are currently draft guidelines. The RBI has invited feedback from stakeholders, including the public and financial institutions, until August 28, 2026. After this consultation period, the RBI will issue final guidelines, which may or may not include modifications based on the feedback received. It is possible that existing loans might be 'grandfathered' (allowed to continue under old rules), with the new regulations applying only to fresh loans. Until the final rules are notified, the current system remains in place, but borrowers and lenders alike are watching closely to see how this significant regulatory shift unfolds.
