What Exactly is the RBI Proposing?
The RBI has released draft amendments proposing that NBFCs can only offer term loans. A term loan is defined as having a fixed principal amount and a pre-determined repayment schedule. The crucial part of the proposal is that once a borrower repays a part of the principal,
that amount cannot be used to restore or replenish the credit limit for re-borrowing. In simple terms, any money you repay against a loan is considered a closed chapter, not a top-up to your available credit. This move effectively prohibits NBFCs from offering revolving credit products like flexi-loans or digital lines of credit, where borrowers can draw, repay, and re-draw funds as needed within a sanctioned limit. The only exception to this proposed ban are NBFCs that are specifically authorised by the RBI to issue credit cards, as revolving credit is fundamental to how credit cards work.
How Does This Differ From Current Practice?
Many NBFCs, and the fintechs they partner with, have built popular products around the concept of revolving credit. These are often marketed as 'flexi-loans' or overdraft-style facilities. For example, a customer might be sanctioned a limit of ₹1 lakh. They could withdraw ₹40,000, and then repay ₹20,000. Under the current revolving system, that repaid ₹20,000 often becomes available for them to borrow again, restoring their available limit. This model offers immense flexibility to the borrower, who can manage short-term cash flow needs without applying for a new loan each time. For NBFCs, it creates customer stickiness and a continuous business relationship. The RBI's proposal seeks to end this practice for all non-credit card lending, pushing NBFCs towards a more rigid, one-time loan structure.
Why is the Regulator Stepping In?
The RBI's primary motivation appears to be rooted in risk management and ensuring better credit discipline. Analysts suggest the central bank is concerned about the practice of 'evergreening', where the revolving nature of a loan could potentially be used to mask stress. In a revolving facility, it can be difficult to distinguish between a borrower making a genuine repayment from their own cash flow versus a borrower drawing down more credit simply to service an existing EMI. By mandating a fixed amortisation schedule where every repayment permanently reduces the principal, the regulator can get a clearer picture of a loan's health and a borrower's true repayment capacity. This move follows earlier RBI actions to tighten norms around unsecured personal loans, suggesting a broader push to de-risk the fast-growing consumer lending space.
The 'Key Money Question' for Lenders
This proposal forces a fundamental rethink of the business model for many NBFCs. Lenders like Bajaj Finance and Tata Capital, which have significant flexi-loan portfolios, may need to completely redesign their products. The impact is threefold. Firstly, it could slow down loan growth, as the convenience of a revolving credit line is a major driver for customer acquisition. Applying for a new term loan for every need introduces friction. Secondly, it could hurt profitability. These flexible products often carry higher fees or yields compared to standard term loans. Thirdly, it affects liquidity management and forecasting for the NBFCs themselves. The continuous cycle of disbursal and repayment within flexi-loans creates a predictable flow of funds that will now be disrupted.
What Does This Mean for Borrowers?
For customers, particularly small business owners and individuals who rely on these credit lines for managing fluctuating income and expenses, the change could mean less flexibility and potentially higher costs. The ability to draw funds as and when needed, and only pay interest on the amount used, is a key benefit of revolving credit. Shifting entirely to term loans might force borrowers to take out a larger sum than immediately necessary and park the unused funds, incurring a 'negative carry' or loss of interest. While the move aims to protect the financial system, it may make access to quick, convenient credit more difficult for a segment of borrowers who have come to depend on these NBFC products. It will be crucial to monitor whether this leads to a credit squeeze or if lenders innovate with new, compliant products that still serve these needs.
