Understanding the Current System
For years, many NBFCs and their fintech partners have offered products that function like a flexible line of credit. Often called 'flexi-loans' or 'overdraft-style' products, they allow a borrower to draw funds, repay a portion, and then draw that repaid
amount again without a new application. For example, if a customer repays ₹20,000 of a ₹1 lakh loan, that ₹20,000 becomes available to borrow again. This model provides immense flexibility for customers and has been a driver of customer acquisition and loyalty for lenders. It is particularly prevalent in the unsecured personal loan and MSME segments.
The RBI's Proposed Changes
The RBI's draft guidelines, released for public comment, aim to fundamentally change this practice. The proposal mandates that NBFCs can only offer 'term loans'. The RBI has defined a term loan as a credit facility with a fixed amount and a predetermined repayment schedule. Crucially, once a part of the principal is repaid, the credit limit cannot be restored or reused. Any product that doesn't meet this strict definition would be classified as a 'revolving credit facility' and would be prohibited for NBFCs. An important exception is made for NBFCs that are specifically authorised by the RBI to issue credit cards, as revolving credit is a core feature of that product.
The Core of the Conflict
The central bank's move is widely seen as a step to increase discipline and curb potential risks in the financial system. Regulators are concerned that such revolving facilities can mask a borrower's true financial stress, a practice sometimes referred to as 'evergreening', where fresh drawdowns are used to service existing debt rather than being funded by genuine cash flow. By enforcing a term-loan structure, every new borrowing would require a fresh assessment, giving lenders a clearer picture of a borrower's creditworthiness. However, NBFCs argue that these flexi-products offer valuable flexibility to borrowers, helping them manage cash flows and minimise interest costs.
Potential Impact on Lenders and Borrowers
If implemented as is, the rules could significantly reshape the lending landscape. For NBFCs, especially those like Bajaj Finance with significant exposure to flexi-loan products, it could dampen loan growth, reduce fee income, and weaken customer stickiness. The stock prices of several major NBFCs fell after the draft rules were announced, reflecting investor concern. For borrowers, the change could mean less convenience. Instead of a standing credit line, they might need to apply for a new term loan for every fresh need. This could also lead to higher borrowing costs, as a customer might have to draw a larger loan upfront and park the unused funds, creating a 'negative carry'.
Industry Reaction and What Comes Next
The financial industry is preparing its feedback, with the deadline for comments set for August 28, 2026. Analysts believe NBFCs will likely lobby the RBI, arguing that their products provide essential flexibility. While the impact could be significant, many experts believe lenders will adapt. NBFCs may redesign their products to be compliant, perhaps by treating every incremental borrowing as a new loan with a fresh assessment. They might also pivot customers to other offerings. The key takeaway is that the RBI is not necessarily against flexi-loans, but is pushing for a system with better visibility of borrower leverage through fresh assessments for fresh borrowing. The final shape of these regulations will be closely watched by the entire financial sector.
