Decoding the RBI's Proposal
The Reserve Bank of India (RBI) released draft guidelines suggesting a major change for NBFCs: they should primarily offer term loans and be restricted from offering revolving credit products. In simple terms, a term loan has a fixed amount and a set
repayment schedule. The key part of the proposal is that once a borrower repays a portion of the loan, that repaid amount cannot be drawn again as fresh credit. This marks a departure from revolving credit facilities, like 'flexi loans', where repaying part of the loan restores the available credit limit for the borrower to use again. This proposed rule, however, does not apply to NBFCs that are specifically authorized by the RBI to issue credit cards, as revolving credit is a fundamental feature of those products.
Current System vs. The Proposal
Currently, many NBFCs offer products that function like a flexible credit line. A customer is sanctioned a total credit limit, say ₹5 lakh. They might borrow ₹2 lakh, repay ₹1 lakh, and under the existing revolving system, that ₹1 lakh becomes available for them to borrow again without a new application. This offers immense convenience and flexibility. The RBI's proposal aims to end this practice for most NBFC loans. Under the new draft rule, that repaid ₹1 lakh would simply reduce the outstanding loan balance. It would not replenish the credit limit. If the borrower needs more funds, they would likely have to go through a new assessment and get a fresh loan disbursed, rather than simply drawing from their existing approved limit.
Why is the RBI Making This Change?
The central bank's move appears to be driven by a desire to increase transparency, reduce risk, and align NBFCs more closely with the stricter regulatory standards of banks. Analysts suggest the primary goal is to curb the risks of 'evergreening', a practice where borrowers use fresh drawdowns from their credit line to service existing debt, masking underlying financial stress. By mandating a fixed repayment schedule without the option to re-borrow, the RBI ensures that loans are paid down systematically from genuine cash flows, not by taking on more debt from the same facility. This shift promotes greater financial discipline for both the lender and the borrower, providing a clearer picture of the loan's performance and the borrower's repayment capacity.
Impact on NBFCs and Borrowers
The proposal could have a significant impact. For borrowers, the biggest change is a loss of flexibility. The convenience of tapping into an already-approved credit line for sudden expenses will be gone. This might force them to borrow funds in advance or apply for new loans more frequently, which could be less convenient and potentially more costly. For NBFCs, especially those with a large portfolio of flexi-loan products, the rule could slow down loan growth and reduce fee income generated from repeated drawdowns. Companies like Bajaj Finance, which heavily utilize such products, saw their stock prices react to the news, as investors weighed the potential impact on their business model. Lenders will likely need to redesign their loan products and shift customers to alternative structures.
What Happens Next?
It is important to remember that these are currently draft guidelines. The RBI has invited feedback from stakeholders, including NBFCs and the public, until August 28, 2026. After this consultation period, the central bank will review the feedback before issuing the final directions. NBFCs are expected to make representations, arguing that revolving credit products offer valuable flexibility to borrowers. The industry will be closely watching for the final notification to see if any changes are made, such as grandfathering existing loans (allowing them to continue under old rules) or other modifications. Until then, the proposal provides a clear indication of the RBI's direction towards a more controlled and structured lending environment for NBFCs.
