Fixed-Term Loans: The Predictable Path
Think of a fixed-term loan as a straightforward contract. You borrow a specific amount of money for a set purpose, like buying a car or a house, and agree to pay it back in predictable installments over a fixed period. The key feature, as defined by the
RBI's draft, is that the loan has a pre-determined repayment schedule, and once you repay any part of the principal, you cannot borrow it again. The loan account is structured and finite; once it's paid off, the deal is done. This predictability is its main strength, making it ideal for large, one-time expenditures where you know exactly how much you need and for how long. Common examples include home loans, auto loans, and personal loans for a specific large purchase.
Revolving Credit: The Flexible Facility
Revolving credit is like having a flexible financial tool at your disposal. The most common example is a credit card. A lender gives you a credit limit, and you can borrow, repay, and borrow again as many times as you need, as long as you stay within that limit. This type of credit is designed for ongoing, variable expenses or managing cash flow, rather than a single large purchase. Its defining feature is reusability; as you pay down your balance, your available credit is replenished. Products like flexi loans, overdraft-style facilities, and digital lines of credit offered by many NBFCs and fintech firms fall into this category.
What the RBI is Proposing
The RBI's draft amendments, released in early August 2026, propose a significant change: NBFCs would only be permitted to offer credit products that are structured as term loans. They would be prohibited from offering revolving credit products. The only exception would be for NBFCs that are specifically authorised by the RBI to issue credit cards, as revolving credit is an inherent feature of that product. The draft formally defines both 'term loan' and 'revolving credit', essentially classifying any credit facility that doesn't meet the strict criteria of a term loan as revolving credit. The public and stakeholders have been invited to provide feedback on these proposals until August 28, 2026.
Why This Distinction Matters
The RBI's primary goal appears to be strengthening financial stability and transparency. From a regulatory perspective, revolving credit lines can sometimes mask underlying stress. For instance, a borrower might use a fresh drawdown from a flexi-loan facility to repay an existing installment, a practice known as evergreening. By pushing NBFCs towards a term-loan-only model, the RBI ensures a clearer picture of a borrower's repayment capacity and the lender's asset quality. Each new need for funds would require a fresh assessment and a new term loan, rather than a simple top-up on an existing line. This move aims to curb regulatory arbitrage and reduce systemic risk within the rapidly growing NBFC sector.
The Impact on Borrowers and Lenders
If these rules are implemented, NBFCs will need to redesign many of their popular 'flexi' loan products. Lenders with a significant portfolio of such loans may see an impact on customer acquisition and growth. For borrowers, the change could mean less flexibility. Instead of having a ready line of credit to dip into, they might need to apply for a new loan for each requirement. This could potentially increase overall borrowing costs if they have to borrow a lump sum in advance and park the unused funds. However, the move could also lead to more transparent products and force better financial discipline. In the long run, the RBI's push is for a healthier, more transparent lending ecosystem where credit risk is more accurately assessed and managed.
