The RBI's New Proposal
The RBI has released draft directions suggesting that NBFCs should only be allowed to offer fixed-term loans. This means they would have to discontinue products that work like revolving credit, such as flexible loans and overdraft-style facilities. The only exception
to this rule would be for the handful of NBFCs specifically authorised by the RBI to issue credit cards, as revolving credit is fundamental to how credit cards operate. The draft, which is open for stakeholder feedback until August 28, 2026, aims to bring more structure and clarity to the lending landscape.
Fixed-Term vs. Revolving Credit
To understand the change, it's crucial to know the difference between the two loan types. A fixed-term loan is straightforward: a specific amount is borrowed and paid back over a set period through scheduled instalments or a single bullet payment. Once you repay it, the loan is closed, and the credit limit does not get replenished. On the other hand, revolving credit works like a flexible credit line. A borrower is given a credit limit and can draw funds, repay them, and then draw funds again as needed. This offers immense flexibility and is popular with self-employed individuals and small businesses whose cash flows can be unpredictable. Many fintech 'Buy Now, Pay Later' (BNPL) schemes and digital credit lines are built on this model.
Why the RBI is Making this Change
The primary motivation behind this proposal appears to be risk management and curbing a practice known as 'evergreening'. Evergreening is when a borrower uses fresh credit to pay off an existing loan, masking the true financial stress of the borrower and preventing the loan from being classified as a non-performing asset (NPA). Revolving credit facilities can inadvertently facilitate this. By pushing for fixed-term loans with clear repayment schedules, the RBI aims to increase transparency and ensure that loan repayments reflect genuine cash flow, not just more borrowing. This is part of a broader push by the RBI to tighten norms and reduce systemic risk in the financial sector.
Impact on Lenders and Borrowers
For NBFCs, the impact could be significant. Companies with a large portfolio of 'flexi' loan products may need to completely redesign them. This could moderate their loan growth, as these flexible products have been a key tool for attracting and retaining customers. Analysts note that lenders like Bajaj Finance and Tata Capital, who have notable exposure to these products, saw their stock prices dip after the proposal was announced. For borrowers, the convenience of flexible, reusable credit lines from NBFCs may disappear. Customers, especially in the MSME segment, might find their borrowing options become more rigid. They might have to borrow fixed amounts in advance, potentially leading to higher interest costs if the funds are not used immediately.
The Road Ahead
It is important to remember these are draft proposals. The RBI is actively seeking feedback, and the final rules could be different. Industry stakeholders will likely make a case for the importance of flexible credit products, highlighting their utility for borrowers. There is also a possibility that the RBI may 'grandfather' existing loans, meaning the new rules would only apply to fresh lending, cushioning the immediate impact. Lenders are also expected to innovate and create new, compliant products that still offer a degree of flexibility to customers. The final outcome will depend on how the regulator balances its goal of financial stability with the credit needs of the economy.
