The RBI's New Blueprint for Lending
The RBI recently issued draft amendments proposing that NBFCs should only offer loans structured as 'term loans'. This means they would be barred from offering 'revolving credit' products, a significant change that could reshape the lending landscape.
The only exception would be for NBFCs specifically authorised to issue credit cards, where revolving credit is a core feature. The central bank has invited feedback from the public and stakeholders on these draft proposals until August 28, 2026, before the rules are finalised.
Fixed-Term Loan vs. Revolving Credit: What's the Difference?
To understand the gravity of this change, it's crucial to know the two loan types. A fixed-term loan is straightforward: a lender gives you a lump sum of money, and you pay it back in regular, predetermined instalments (EMIs) over a set period. Once you repay the principal, the loan is closed. Revolving credit, on the other hand, is like a flexible, open credit line. Think of products often called 'flexi loans'. You are given a credit limit and can withdraw, repay, and withdraw again as you please, as long as you stay within your limit. This structure offers convenience but, in the eyes of the regulator, can also hide risks.
Why the RBI is Pushing for This Change
The RBI's primary motivation appears to be managing systemic risk and enhancing transparency. Flexible, revolving credit lines can sometimes mask a borrower's financial stress, as they might use fresh drawdowns to service existing debt—a practice known as 'evergreening'. By insisting on fixed-term loans with clear repayment schedules, the regulator gets better visibility into the financial health of both the borrower and the NBFC. This move is aimed at ensuring that loans are repaid from genuine cash flows, not by taking on more debt, thereby strengthening the stability of the entire financial system.
The Impact on NBFCs and Fintechs
For NBFCs, especially those with high exposure to 'flexi-credit' products, this is a significant development. Companies like Bajaj Finance and Tata Capital, known for such offerings, saw their share prices dip following the announcement. These lenders will likely need to redesign their loan products, potentially affecting customer acquisition and loan growth. The rules will particularly impact the digital lending space, where many 'Buy Now, Pay Later' (BNPL) and credit line apps are powered by NBFCs using a revolving credit model. They will have to pivot to a term-loan-only structure, which could reduce the seamlessness that made them popular.
What It Means for You, the Borrower
If you are a customer, the change brings both pros and cons. On the downside, the convenience of a ready credit line for emergencies or business needs might diminish. Instead of drawing funds instantly from a pre-approved limit, you may need to apply for a new term loan each time, which involves a fresh assessment. This could make borrowing slightly more cumbersome and potentially more expensive, as you might borrow funds before you need them, incurring interest costs. On the upside, the new structure promotes better financial discipline. It prevents the potential debt trap of endlessly rolling over credit and encourages a more structured approach to borrowing and repayment.
