What Are the Proposed Changes?
The RBI has released draft amendments targeting how NBFCs lend money. The core proposal is to prohibit NBFCs from offering any form of revolving credit. Instead, they would be restricted to offering only 'term loans'. A term loan is defined as a loan with
a fixed principal amount, a predetermined repayment schedule (either in installments or as a single bullet payment), and crucially, a limit that cannot be restored or reused once repaid. Any credit product that doesn't meet this strict definition would be classified as revolving credit and therefore disallowed. The central bank has invited feedback from stakeholders on these proposals until August 28, 2026.
The End of Flexi-Loans and Credit Lines
This proposed change directly targets popular products like flexi-loans, overdraft-style facilities, and digital lines of credit that have become a mainstay for many NBFCs. These products allow borrowers to draw, repay, and re-draw funds multiple times within a sanctioned limit, offering significant flexibility. This model is particularly prevalent in the personal loan, MSME working capital, and fintech lending segments, including many 'Buy Now, Pay Later' (BNPL) services that are powered by NBFC credit lines. The RBI's move aims to curb risks like evergreening, where fresh drawdowns are used to service existing debt, and to bring more uniformity to lending structures.
The 'Key Money Question': Impact on NBFCs
The central financial issue for NBFCs is the potential disruption to their business models and profitability. The ban on revolving credit could slow customer acquisition, compress yields, and reduce fee income. Lenders with significant exposure to these products, like Bajaj Finance, saw their share prices fall following the announcement as investors weighed the impact. NBFCs will need to redesign their products to be compliant, which could make them less attractive to customers who value flexibility. Analysts suggest that diversified NBFCs may be better positioned to weather the change by offering alternative products, while the entire industry argues that these revolving products offer borrowers lower interest costs compared to taking a full term loan upfront.
The Exception: NBFC-Issued Credit Cards
The proposed restrictions include a significant exception: NBFCs that are specifically authorised by the RBI to issue credit cards. Since revolving credit is an inherent feature of credit cards, these authorised lenders can continue their operations without change. However, obtaining RBI approval to issue credit cards is a high bar, requiring a minimum net owned fund of ₹100 crore and a specific license. Currently, very few NBFCs, such as SBI Card, have this authorisation. This exception creates a clear distinction in the market, favouring a small number of licensed players while pushing most others towards a term-loan-only model.
What Does This Mean for Borrowers?
For consumers and small businesses, the changes could be a mixed bag. On the one hand, the move promotes greater transparency and disciplined borrowing through structured EMI schedules. On the other hand, it removes the flexibility that many have come to rely on for managing cash flow or for emergencies. A shift to term loans could mean higher borrowing costs, as customers might have to borrow a lump sum in advance and incur interest on unused funds. Borrowers who use digital credit lines or BNPL services backed by NBFCs may find these products restructured or discontinued, forcing them to seek alternatives like bank overdrafts or traditional credit cards.
