The Problem with 'Flexi' Loans
The RBI's primary concern revolves around what are known as 'revolving credit facilities' or 'flexi-loans'. Unlike a standard term loan with a fixed repayment schedule, these products allow a borrower to draw down funds, repay a portion, and then have
that repaid amount become available to borrow again, all within a pre-sanctioned limit. While convenient, regulators worry this structure can mask a borrower's true financial stress. Analysts suggest this is a move to curb the risk of 'evergreening', where borrowers use fresh drawdowns from the same facility to service existing debt, rather than using genuine cash flow. This can create a cycle of debt that hides underlying credit weaknesses until it's too late.
The RBI's Proposed Solution: Term Loans Only
The draft amendment is straightforward: NBFCs would be required to offer credit only in the form of 'term loans'. The RBI has formally defined a term loan as a credit facility with a fixed principal amount and a predetermined repayment schedule. Crucially, once any part of the principal is repaid, the sanctioned limit cannot be restored or replenished for re-borrowing. Any credit product that doesn't fit this definition would be considered a revolving credit facility and would be prohibited for NBFCs. There is a key exception: NBFCs that are specifically authorised by the RBI to issue credit cards will be exempt from this restriction, as the revolving credit model is fundamental to how credit cards operate.
Why This, and Why Now?
This proposal is part of the RBI's broader push for greater regulatory oversight and stability within the rapidly growing NBFC sector. Over the past few years, the central bank has taken several steps to harmonise the rules for banks and large NBFCs, recognising their systemic importance. The rapid growth in unsecured personal loans from NBFCs has been on the RBI's radar, leading to increased risk weights in late 2023 to encourage more cautious lending. By clearly defining loan structures and limiting the open-ended nature of flexi-loans, the RBI aims to enforce better credit discipline, prevent the build-up of hidden risks, and ensure that loan books more accurately reflect borrower repayment capacity.
The Impact on NBFCs and FinTech
The immediate market reaction saw the stocks of major NBFCs with high exposure to flexi-loan products, like Bajaj Finance and Tata Capital, take a hit. Analysts estimate that for some large players, these products could account for 15-20% of their assets under management. The rules, if implemented, will force many lenders to redesign their products. This could impact customer acquisition, loan growth, and fee income generated from these flexible products. The move will also significantly affect the fintech space, as many 'Buy Now, Pay Later' (BNPL) schemes and digital credit lines are powered by revolving credit facilities provided by partner NBFCs.
What It Means for Borrowers
For customers, the proposed changes are a mixed bag. On one hand, the convenience of a flexi-loan — being able to tap into a pre-approved credit line as needed — will likely diminish. Needing to apply for a new term loan for every fresh requirement could be more cumbersome. Some argue that this could increase the effective cost for borrowers who may have to borrow funds in advance and park them, rather than drawing them down as needed. On the other hand, the regulations are designed to protect borrowers from falling into a debt trap. The structured nature of a term loan provides clarity on repayment obligations and prevents the cycle of re-borrowing to pay off debt, promoting healthier financial habits in the long run.
