The End of an Era for Flexible Credit
The most significant proposal from the RBI is a plan to stop NBFCs from offering revolving credit facilities. This includes popular products like 'flexi loans' and overdraft-style credit lines that many small businesses and individuals rely on for flexible
cash flow. Under the draft rules, all new lending from NBFCs would have to be structured as fixed-term loans. This means a set principal amount is disbursed and must be repaid according to a pre-agreed schedule. Once the loan is repaid, the credit limit does not automatically become available again for the borrower to draw from. This marks a fundamental shift away from the flexible, reusable credit lines that have been a key product for many non-bank lenders. The only exception would be for the few NBFCs specifically authorised by the RBI to issue credit cards.
Why the RBI is Making This Change
The RBI's move appears aimed at standardising lending products and reducing systemic risk. By pushing NBFCs towards a term-loan-only model, the regulator can ensure more transparent and predictable repayment structures. This is part of a broader strategy to align the rules for NBFCs more closely with those for commercial banks, creating a more level playing field. There are also concerns about 'evergreening', where borrowers might use fresh drawdowns from a revolving credit line to service existing debt rather than from genuine cash flow. By mandating fixed amortisation schedules, the RBI hopes to instill greater credit discipline and get a clearer picture of the true health of loan portfolios across the sector.
The Impact on NBFCs and Fintechs
For the NBFCs themselves, the changes will require a significant redesign of their product portfolios. Companies with a heavy reliance on flexi-loan products may see their loan growth moderate and profitability squeezed, as these products often carry higher yields and annual fees. The stock market reacted swiftly to the news, with shares of major NBFCs falling on concerns about the impact on their business models. Fintech companies that partner with NBFCs to offer 'Buy Now, Pay Later' (BNPL) schemes and other credit line-based products will also be heavily affected, as many of these services are built on the revolving credit framework that the RBI proposes to ban. Lenders will need to innovate and develop new, compliant loan products to retain their customer base.
What It Means for Borrowers
If you are a small business owner or a self-employed professional, you may find your access to flexible working capital from NBFCs restricted. The convenience of drawing funds as needed and repaying based on cash flow may be replaced by the rigidity of a standard term loan. This could push many borrowers who need that flexibility towards banks, which are not covered by this rule and can continue to offer overdraft facilities. For individuals using credit lines from fintech apps for everyday expenses or emergencies, those options might soon disappear or be converted into small, fixed-term loans. Borrowers will need to check the terms of their existing credit lines to see if they are provided by an NBFC and prepare for potential changes if the draft rules are finalised.
What Happens Next?
It is important to remember that these are currently draft proposals. The RBI has invited comments and feedback from stakeholders, including the NBFCs themselves, until August 28, 2026. This consultation process could lead to modifications in the final guidelines. Industry experts believe it is likely that the RBI will 'grandfather' existing revolving credit facilities, meaning the new rules would apply only to new loans, limiting disruption to outstanding loan books. However, the direction of regulatory thinking is clear. The era of loosely structured, flexible credit from NBFCs is likely coming to a close, to be replaced by a more regulated and standardised approach to lending.
