What Are the Proposed Changes?
The most significant proposal in the RBI's draft, released on August 6, 2026, is to prohibit NBFCs from offering revolving credit facilities. This means products like flexible personal loans, digital credit lines, and overdraft facilities, where a borrower
can draw, repay, and redraw funds from a pre-sanctioned limit, would no longer be permitted. Instead, NBFCs would be restricted to offering only 'term loans'—credit with a fixed amount, a fixed repayment schedule, and a limit that cannot be replenished once repaid. This rule would not apply to NBFCs that are specifically authorised by the RBI to issue credit cards, as revolving credit is a core feature of that product.
Why is the RBI Making This Change?
The central bank's primary motivation appears to be reducing systemic risk and strengthening regulatory oversight. For years, the RBI has aimed to maintain a clear distinction between banks, which handle working capital and revolving credit, and NBFCs, which are seen as term lenders. Analysts suggest the move is designed to curb the risk of 'evergreening', a practice where borrowers use fresh drawdowns from a revolving facility to service existing debt, hiding financial stress. By enforcing fixed repayment schedules, the RBI aims to get a clearer picture of asset quality and prevent the build-up of hidden risks within the financial system.
The Impact on NBFCs
The draft rules, if finalised, will force many NBFCs and their fintech partners to overhaul their product portfolios. Companies with significant exposure to 'flexi-loan' products, like Bajaj Finance, saw their stock prices dip following the announcement, reflecting investor concern. The changes could slow down customer acquisition, reduce loan growth, and compress fee income for these lenders. However, some analysts believe that diversified NBFCs are better positioned to manage the disruption by redesigning their products or shifting customers to other offerings, such as gold loans. The industry is expected to lobby for selective curbs rather than a blanket ban, perhaps seeking exemptions for secured lending.
What Does This Mean for Borrowers?
For millions of individuals and small businesses, the change could mean less flexibility. Revolving credit lines are a crucial source of emergency liquidity and working capital, allowing users to borrow only what they need and manage uncertain cash flows. Moving entirely to term loans might force borrowers to take out larger sums than immediately necessary, leading to higher interest costs. Many 'Buy Now, Pay Later' (BNPL) services, which often rely on NBFC-backed revolving credit, could also be affected. Borrowers who depend on these flexible credit products may need to explore alternatives, such as building an emergency fund or seeking overdraft facilities from traditional banks.
The Road Ahead
These changes are currently in a draft stage. The RBI has invited feedback from stakeholders, including NBFCs and the public, until August 28, 2026. This consultation period will be crucial in shaping the final guidelines. After reviewing the feedback, the RBI will issue a final circular, which will likely include a transition timeline for NBFCs to comply with the new rules. The central bank's goal is to strike a balance between fostering financial innovation and ensuring the stability of India's rapidly growing non-bank lending sector.
