What Are the Proposed Rules?
In early August 2026, the RBI released a draft circular proposing a significant change for NBFCs. The core idea is to restrict NBFCs to offering only 'term loans'. This means they would be barred from providing 'revolving credit facilities'. The only exception
would be for NBFCs specifically authorised by the RBI to issue credit cards, as revolving credit is an essential feature of that product. This move aims to bring more clarity and regulatory consistency to the fast-growing NBFC sector.
Term Loan vs. Revolving Credit
To understand the change, it’s crucial to know the difference. A term loan is what most people think of as a traditional loan: you get a fixed amount of money and repay it over a set period with a pre-decided schedule. Once you repay it, the loan is closed. You can't just draw that money again. In contrast, revolving credit works like a credit line or overdraft facility. You have an approved limit and can borrow, repay, and borrow again multiple times without a new application. Many popular 'flexi-loans', digital credit lines, and even some 'Buy Now, Pay Later' (BNPL) products are built on this model when offered by NBFCs.
Why is the RBI Making This Change?
The primary concern for the RBI is risk management and financial stability. With revolving credit lines, it can be difficult to track a borrower's true repayment behaviour. There is a risk of 'evergreening', where a borrower might draw fresh funds from their credit line simply to pay the interest or a part of the principal on the same loan. This masks potential financial stress and doesn't reflect a genuine ability to repay. By pushing lending towards a fixed term-loan structure, the regulator ensures each loan has a clear repayment path and end date, making credit assessment and monitoring more straightforward.
Who Will Be Affected?
The impact will be felt across the board. For NBFCs, especially large players like Bajaj Finance and others with significant 'flexi-loan' portfolios, this will require a major product redesign. These products are popular because they encourage customer loyalty and repeat business. For borrowers, the convenience of a ready credit line might disappear. Needing extra funds would require a fresh assessment and a new term loan, adding friction to the borrowing process. While this might reduce flexibility, the RBI's goal is to enforce better credit discipline for both lenders and borrowers.
What's the Industry Reaction?
The proposal has caused a stir, with the stocks of several major NBFCs taking a hit immediately after the announcement. Analysts note that the rules could impact everything from personal loans to MSME working capital facilities and supply chain credit products structured as overdrafts. Some in the industry feel a blanket ban is unfair and that there should be a distinction for secured revolving credit used for legitimate business financing. However, others believe the move will force NBFCs to strengthen their asset-liability management and focus more on financial stability.
What Happens Next?
It's important to remember that these are currently draft guidelines. The RBI has invited comments and feedback from stakeholders, including NBFCs and the public, until August 28, 2026. After this consultation period, the central bank will review the feedback before issuing final regulations. NBFCs are expected to make representations, arguing that these products offer valuable flexibility to borrowers. The final rules may see some modifications, but the direction is clear: the RBI wants greater oversight and a more disciplined approach to lending in the NBFC sector.
