The Core Proposal: Restricting Revolving Credit
The Reserve Bank of India (RBI) has released draft amendments that could fundamentally change how Non-Banking Financial Companies (NBFCs) lend money. The most significant proposal is to prohibit NBFCs from offering 'revolving credit' facilities. Instead,
they would be restricted to providing 'term loans'. A term loan is a standard loan with a fixed amount, a set number of instalments, and a clear repayment schedule. Once you pay it back, the loan is closed. Revolving credit, on the other hand, works like a credit line where you can borrow, repay, and then borrow again up to a sanctioned limit. This proposal, if finalised, would significantly reshape many popular lending products.
Which Products Are in the Crosshairs?
The primary targets of this proposed change are flexible loan products that have become increasingly popular, especially through fintech partnerships. This includes 'flexi loans', digital lines of credit, and many 'Buy Now, Pay Later' (BNPL) schemes that allow users to draw and repay funds as needed. These products rely on a revolving credit structure. Under the draft rules, NBFCs would have to redesign or discontinue these offerings. The restriction would not apply to NBFCs that are specifically authorised by the RBI to issue credit cards, as revolving credit is an essential feature of that product.
Why is the RBI Proposing This Change?
The central bank's move is widely seen as an attempt to enhance regulatory oversight and reduce systemic risks within the rapidly growing NBFC sector. A key concern is the practice of 'evergreening', where borrowers might use fresh drawdowns from a revolving facility to pay the interest on the same loan, hiding the true stress in the account. By mandating fixed term loans with clear amortisation schedules, the RBI aims to bring more transparency and discipline to the lending process. This is part of a broader push by the RBI to strengthen prudential norms for NBFCs, which play a crucial role in providing credit to various sectors of the economy.
Impact on Borrowers: Less Flexibility, More Discipline
For borrowers, the implications are twofold. On one hand, the new rules could lead to a more disciplined credit environment. On the other, it could mean the end of the flexibility that many have come to rely on. Many individuals and small businesses use revolving credit lines for managing short-term cash flow needs. Shifting entirely to term loans might force them to borrow funds in advance of when they are needed, potentially leading to higher interest costs. The rules could disproportionately affect low-income borrowers and MSMEs who depend on the quick and flexible credit offered by fintechs and NBFCs. Lenders may have to shift customers to other products, such as gold loans, to offer similar flexibility.
What Happens Next?
It's important to remember that these are currently draft rules. The RBI has invited comments and feedback from stakeholders, including lenders and the public, until August 28, 2026. Industry bodies and NBFCs are expected to make representations to the central bank, arguing that revolving credit products offer significant flexibility to borrowers. Based on this feedback, the RBI may modify the proposals before issuing the final guidelines. Analysts believe that even if the rules are implemented, there might be a transition period, and existing loans could potentially be grandfathered, meaning the rules would only apply to new loans. For now, the financial world is watching closely to see how the final regulations take shape.
