The Big Change: No More Revolving Credit
The heart of the RBI's new proposal is a plan to stop most NBFCs from offering 'revolving credit'. This may sound technical, but it affects many popular loan products. Revolving credit is any facility where you can borrow, repay, and then borrow again
from the same approved limit, much like a credit card. Products like flexi-loans, digital credit lines offered by fintech apps, and some 'Buy Now, Pay Later' services often use this structure. Under the draft rules, NBFCs would generally be restricted to offering only 'term loans'. A term loan has a fixed amount, a fixed repayment schedule, and once you repay a part of the loan, you cannot draw that money again. The only exception would be for NBFCs specifically authorized by the RBI to issue credit cards.
Why is the RBI Proposing This?
The regulator's primary goal is to enhance financial stability and protect consumers. Industry experts believe the RBI wants to draw a clearer line between the lending activities of banks and NBFCs, with working capital and revolving credit being primarily handled by the banking sector. There are also concerns about risk. The flexibility of revolving credit can sometimes make it difficult to monitor a borrower's true repayment capacity. By moving NBFCs towards a more structured term-loan model, the RBI aims to get a clearer picture of asset quality and reduce systemic risks. Some analysts note that these types of loans can also be used for 'evergreening', where fresh drawdowns are used to pay off existing dues, hiding potential stress in the system.
How Will This Affect NBFCs and Fintechs?
The impact could be significant. NBFCs with a large portfolio of flexi-loan products, like Bajaj Finance, saw their stock prices fall after the proposal was announced. These companies may need to redesign their popular loan products. The move could slow down loan growth and reduce fee income, as revolving products often generate charges on repeated use. This also has major implications for the fintech world. Many lending apps partner with NBFCs to offer digital credit lines; these partnerships would have to be completely re-thought. However, industry bodies are expected to ask the RBI for a more selective approach, possibly seeking exemptions for secured lending or business-focused supply chain finance.
What Does This Mean for Borrowers?
If you currently use a flexi-loan or a digital credit line from an NBFC, these products might be phased out or restructured. The convenience of drawing money as and when needed from an approved limit may disappear. Instead, you would likely be offered a standard term loan with fixed EMIs. While this brings more predictability, it reduces flexibility. For new borrowers, it may mean fewer options for flexible, short-term credit from non-bank lenders. It will become crucial to check whether the credit line you use is backed by a bank or an NBFC, as the rules only apply to the latter. This change could push consumers to either take standard term loans or look towards banks for overdraft facilities or credit cards.
What Happens Next?
It's important to remember that these are draft proposals. The RBI has invited feedback from the public and stakeholders until August 28, 2026. After this consultation period, the regulator will issue final guidelines. Lenders are likely to request that existing loans be grandfathered, meaning the new rules would only apply to fresh loans. But the direction is clear: the RBI is tightening its oversight of NBFCs to ensure the financial system remains stable. For now, borrowers should monitor the final announcements and be prepared for potential changes in the way they access credit from NBFCs.
