Decoding the RBI's Draft Proposal
In early August 2026, the Reserve Bank of India issued draft amendments that could reshape a large part of the lending market. The proposal states that Non-Banking Financial Companies should primarily offer 'term loans'. A term loan is a credit facility
with a fixed principal amount and a predetermined repayment schedule. Crucially, the draft rule says that once a part of the principal is repaid, the sanctioned limit cannot be restored or replenished for fresh borrowing. This move effectively bars NBFCs from offering 'revolving credit' products, where borrowers can draw, repay, and redraw funds multiple times within an approved limit. The central bank has invited feedback from stakeholders on these proposals until August 28, 2026.
The Exception to the Rule
There is one major exception to this proposed ban on revolving credit. The restriction will not apply to NBFCs that are specifically authorised by the RBI to issue credit cards. Revolving credit is an inherent feature of credit cards, and the RBI has carved out an exception for these players. Currently, only a few NBFCs, such as SBI Card and BoB Cards, are authorised to issue credit cards independently. This means that while many popular fintech-led credit lines could be affected, traditional credit card operations from authorised NBFCs will continue as usual. Some other NBFCs also offer co-branded credit cards in partnership with banks, which exist in a slightly different category.
Why Is the RBI Making This Change?
The RBI's proposal is seen by analysts as a move to enhance regulatory oversight, curb certain risks, and create a more level playing field between banks and NBFCs. One key concern is the potential for 'evergreening' of loans, where fresh drawdowns from a revolving facility might be used to service existing debt rather than being supported by genuine cash flows. By pushing most lending towards a fixed-term loan structure, regulators can get a clearer picture of asset quality and reduce systemic risk. This move is part of a broader trend by the RBI to harmonise regulations across different financial institutions to prevent regulatory arbitrage, where companies might exploit loopholes between different sets of rules.
Impact on Borrowers and 'Flexi' Loans
For consumers, this change could be significant. Many popular products, often marketed as 'flexi loans', 'overdraft facilities', or 'buy now, pay later' (BNPL) schemes, are built on the revolving credit model offered by NBFCs. These products offer convenience, allowing customers to use and repay a credit line as needed without going through a new loan application process each time. Under the proposed rules, this flexibility would disappear for most NBFC-offered products. Instead of being able to reuse their credit limit after repayment, a borrower would need to apply for a new term loan for any additional funding, making the process less convenient. This could potentially increase borrowing costs for consumers who previously relied on the flexibility of these products.
The NBFC and Fintech Perspective
The draft rules have sent ripples through the NBFC and fintech sectors. Companies with a significant portfolio of revolving credit products, like certain flexi-loans, are most affected. Following the announcement, stock prices of several major NBFCs with high exposure to such products saw a decline. These companies may need to redesign their loan products to be compliant with the new framework, potentially affecting their product economics and customer acquisition strategies. Analysts note that this could lead to a significant restructuring of products offered by NBFC-fintech partnerships, particularly those in the MSME and unsecured personal loan segments.
