The RBI's Draft Proposal Explained
The Reserve Bank of India has released draft amendments that would require NBFCs to offer only term loans. This move would effectively prohibit them from offering revolving credit facilities, a popular product for millions of customers. The key exception
to this rule would be for NBFCs that are specifically authorised by the RBI to issue credit cards, for which revolving credit is a core feature. The draft rules, open for public comment until August 28, 2026, aim to bring greater clarity and regulatory oversight to the lending products offered by non-bank entities.
What is Revolving Credit?
Think of revolving credit like a credit card or a flexible credit line. It gives you a pre-approved limit, and you can withdraw, repay, and withdraw again as many times as you need, as long as you stay within that limit. Many 'flexi loans', 'buy now, pay later' (BNPL) schemes, and overdraft-style facilities offered by NBFCs and fintech apps use this structure. Its main advantages are flexibility and instant access to funds for fluctuating needs. However, the interest is charged on the amount you use, and this can be variable.
Understanding Fixed-Term Loans
A fixed-term loan is what most people think of as a traditional loan, such as a personal loan, car loan, or home loan. You borrow a specific amount of money and repay it in fixed monthly instalments (EMIs) over a pre-decided period. Under the RBI's proposed definition, the key feature of a term loan is that once you repay the principal, your credit limit is not restored; you cannot borrow that money again without applying for a new loan. This structure provides predictability for both the lender and the borrower.
Why is the RBI Proposing This Change?
The primary goal appears to be strengthening consumer protection and curbing risks. Analysts suggest the move is aimed at preventing 'evergreening', where borrowers might use fresh drawdowns from a revolving facility to pay off existing debt, rather than using genuine cash flow. By pushing for structured term loans with clear repayment schedules, the RBI wants to ensure greater transparency and discipline in the lending market. This move is seen as a way to address potential borrower stress that might be hidden by the flexible nature of revolving credit.
What This Means for Borrowers
If the draft rules are implemented, the biggest change for consumers will be a reduction in flexible credit options from NBFCs. The convenience of a reusable credit line for emergencies or managing cash flow will likely disappear from most NBFC offerings. Customers might have to shift to more structured term loans, which could mean applying for a fresh loan every time they need additional funds. This could make borrowing costs higher for some, as they might have to borrow a lump sum in advance and incur interest on it before it is fully used. Products like vehicle finance, housing loans, and gold loans, which are already structured as term loans, will likely remain unaffected.
How NBFCs and FinTechs Might Adapt
NBFCs with significant exposure to flexi-loan products will be the most affected and may need to completely redesign their offerings. The stock prices of several large NBFCs fell after the proposal was announced, reflecting investor concerns about impacts on loan growth and profitability. However, many analysts believe the industry will adapt. NBFCs are expected to make representations to the RBI, but they will also likely work on creating new, compliant loan products that still meet customer needs. This could lead to a new wave of innovation in financial products that fit within the term-loan framework.
