The Proposed Shift in Credit Rules
The Reserve Bank of India (RBI) has introduced draft amendments that could fundamentally alter how Non-Banking Financial Companies (NBFCs) offer credit. The core of the proposal is to restrict NBFCs to providing only term loans, which have a fixed principal
and a predetermined repayment schedule. Crucially, under these proposed rules, once a borrower repays part of the loan, that amount cannot be drawn again. This effectively puts an end to revolving credit facilities from NBFCs, except for those specifically authorised to issue credit cards.
Revolving Credit vs. Term Loans
To understand the impact, it’s important to know the difference between the two loan types. A revolving credit facility, like many 'flexi loans' or digital credit lines, allows you to borrow, repay, and then re-borrow funds up to a sanctioned limit. For instance, if you have a ₹1 lakh limit, borrow ₹30,000, and then repay ₹10,000, your available limit for borrowing again increases. In contrast, a term loan is a one-time disbursement. Once you repay an instalment, that part of the principal is considered paid off and your credit limit does not get replenished. The RBI's draft defines any facility that isn't a term loan as revolving credit and seeks to bar NBFCs from offering it.
Why Is the RBI Making This Change?
The primary motivation behind these draft rules appears to be enhancing consumer protection and curbing certain risks. Regulators are concerned about the potential for 'evergreening', where borrowers might use fresh drawdowns from a revolving facility to pay off existing dues, masking underlying financial stress. By mandating fixed-term loans with clear amortisation schedules, the RBI aims to bring more transparency and discipline to the lending practices of NBFCs. This ensures that each loan has a clear end date and prevents borrowers from falling into a continuous cycle of debt with a single facility.
What This Means for Borrowers
If these rules are finalised, the convenience offered by many popular 'flexi-loan' products will be significantly reduced. These products, often used for managing fluctuating cash flows or as an emergency credit line, rely on the ability to reuse the credit limit after partial repayment. For consumers, borrowing from NBFCs would become less flexible. Instead of drawing from a pre-approved line of credit as needed, they might have to apply for a new term loan for every fresh requirement. This could lead to more paperwork and less convenience, though it may also encourage more disciplined borrowing habits.
Which Products Are Affected?
The proposed changes are expected to impact a wide range of products offered by NBFCs. This includes flexi personal loans, overdraft-style facilities for small businesses (MSMEs), and digital lines of credit provided by many fintech apps in partnership with NBFCs. Many 'Buy Now, Pay Later' (BNPL) services that operate on a revolving credit model backed by NBFCs could also be affected. However, the rules explicitly exempt NBFCs that are authorised by the RBI to issue credit cards, as revolving credit is a fundamental feature of that product.
What Happens Next?
It is important to remember that these are currently draft guidelines. The RBI has invited feedback from stakeholders, including NBFCs and the general public, until August 28, 2026. After this consultation period, the central bank will review the feedback and may make modifications before issuing the final directions. NBFCs are likely to present their case, arguing that revolving credit products offer valuable flexibility to borrowers. The industry may adapt by redesigning products or shifting customers to alternative structures once the final rules are clear.
