What is the RBI Proposing?
The RBI has issued draft guidelines suggesting that NBFCs should primarily offer 'term loans' and stop providing 'revolving credit facilities'. In simple terms, this means most loans from NBFCs would have a fixed repayment schedule, and once you repay a part
of the loan, you cannot automatically borrow that amount again. The main exception to this proposed rule would be for NBFCs specifically authorised by the RBI to issue credit cards, as revolving credit is a core feature of how credit cards work. The central bank has invited feedback from stakeholders on these draft amendments until August 28, 2026.
Term Loan vs. Revolving Credit
To understand the impact, it's crucial to know the difference. A 'term loan' is what most people think of as a traditional loan: you borrow a fixed amount and repay it in scheduled instalments (like an EMI) over a set period. Once a part of the principal is repaid, that portion of your credit line is considered closed. On the other hand, 'revolving credit'—often seen in 'flexi' loans—is different. Imagine you have a sanctioned limit of ₹5 lakh. You borrow ₹2 lakh and then repay ₹1 lakh. Under a revolving credit system, that ₹1 lakh becomes available for you to borrow again without a new application. The RBI's proposal aims to restrict NBFCs to the first model, the term loan, for most of their lending.
The Impact on Borrowers
For customers, this change primarily affects convenience and flexibility. Popular products like flexi personal loans, overdraft facilities, and some digital credit lines would need to be redesigned. Currently, these products allow borrowers to draw and repay funds as needed within an approved limit, which is especially useful for self-employed individuals and small businesses with fluctuating cash flows. Under the new proposal, if a borrower needs additional funds after making a partial repayment, they might have to go through a fresh assessment and loan disbursal process instead of simply drawing from their existing limit. This adds a layer of friction and could make borrowing less convenient for repeat needs.
Why is the RBI Making This Change?
The regulator's primary goal appears to be strengthening credit discipline and reducing certain risks in the financial system. Analysts suggest the move is aimed at curbing the risk of 'evergreening', a practice where borrowers might use fresh drawdowns from a revolving facility to service existing debt, rather than using genuine income. By enforcing a pre-determined repayment schedule and not allowing the limit to automatically replenish, the RBI ensures a clearer picture of a loan's lifecycle and a borrower's repayment capacity. This move provides greater regulatory clarity on the types of credit facilities NBFCs can offer and promotes a more consistent framework.
What This Means for NBFCs
NBFCs will need to adapt. Many companies have built products and attracted customers based on the flexibility of revolving credit. These 'flexi' products often improve customer retention and support loan book growth. The proposed change would require these companies to restructure their offerings. While this caused an initial stir in the market, with shares of some major NBFCs falling, experts believe the industry can adapt. Lenders might redesign their products to be compliant, for instance, by creating more streamlined processes for sanctioning subsequent term loans for existing customers. The final impact will depend on the final version of the guidelines and how existing loans are treated.
