The Big Shift in Lending Rules
The Reserve Bank of India (RBI) has put forward draft amendments that could fundamentally change how Non-Banking Financial Companies (NBFCs) lend money. The central proposal is to restrict most NBFCs to offering only 'term loans' and to prohibit them
from providing 'revolving credit' facilities. This move is part of a broader regulatory effort to bring more clarity and oversight to the non-bank financial sector. The draft introduces formal definitions for both term loans and revolving credit for the first time in the NBFC context, drawing a clear line between the two. The public and industry stakeholders have been invited to provide feedback on these proposals until August 28, 2026.
Term Loans vs. Revolving Credit
To understand the gravity of the change, it’s crucial to know the difference between the two lending structures. A term loan, as defined by the RBI's draft, is a loan where a fixed amount is disbursed and must be repaid according to a pre-agreed schedule. Crucially, once a part of the principal is repaid, the borrower cannot draw that amount again; the credit limit does not get restored. In contrast, revolving credit facilities—like flexi loans or overdraft-style products—allow borrowers to draw, repay, and then reuse funds within a sanctioned limit without needing a new loan application each time. The draft rules state that any fund-based facility that doesn't meet the strict criteria of a term loan will be considered revolving credit and, therefore, prohibited for most NBFCs.
Why is the RBI Making this Change?
The primary driver behind this proposal is risk management and transparency. Analysts suggest the move is aimed at curbing the risk of 'evergreening', where fresh drawdowns from a revolving facility are used to service existing debt, masking the true financial health of the borrower and the loan. By pushing NBFCs toward structured term loans with fixed repayment schedules, the RBI can better monitor repayment behaviour and borrower stress. Industry experts note that the central bank has been signalling its discomfort with these products for some time, viewing them as too similar to credit cards, which require specific authorisation to issue. The goal appears to be to create a clearer distinction between the lending roles of banks, which traditionally offer working capital facilities, and NBFCs.
Impact on NBFCs and Their Products
If implemented, these rules will force many NBFCs to overhaul a significant portion of their product portfolios. Popular 'flexi loan' and digital credit line products, particularly in the unsecured personal loan and MSME segments, are likely to be impacted. Lenders like Bajaj Finance and Tata Capital, which have a notable exposure to revolving credit products, saw their stock prices fall following the announcement. According to estimates, such facilities could account for around 15% of Bajaj Finance's assets. NBFCs may experience a moderation in loan growth and some pressure on profitability, as flexi loans often carry higher yields and fees.
What It Means for Borrowers
For customers, especially self-employed individuals and small businesses, the change could mean less flexibility. Revolving credit products are popular because they allow borrowers to manage cash flow needs efficiently, drawing funds only when required and minimising interest costs. Under the new regime, needing additional funds would likely require a fresh loan assessment, adding friction to the borrowing process. This could make borrowing less convenient and potentially more expensive, as borrowers might have to take out larger term loans and park unused funds, incurring a 'negative carry'. However, the move may also protect borrowers by enforcing a more disciplined repayment structure.
The Path Forward
The draft rules are not yet final, and the industry is expected to make representations to the RBI. Some NBFCs are hoping for a distinction to be made between secured and unsecured revolving credit, or for existing loan facilities to be grandfathered, which would mitigate the immediate impact. Many believe that lenders will adapt by redesigning their loan products to be compliant while trying to retain the customer proposition. While this regulatory tightening may create short-term challenges, the long-term objective is to foster a more stable and transparent financial ecosystem by standardising lending practices across the NBFC sector.
