What Are the Proposed Changes?
The RBI has released draft amendments that propose to restrict NBFCs from offering revolving credit facilities, with an exception for credit cards. This means that popular products like flexi-loans, overdraft facilities, and digital lines of credit, where
borrowers can draw, repay, and redraw funds from a sanctioned limit, would effectively be banned. Instead, the RBI is pushing for NBFCs to primarily offer term loans. A term loan involves a fixed amount disbursed to the borrower, which must be repaid on a pre-determined schedule, either in installments or as a single bullet payment. Crucially, once any part of the principal is repaid, the credit limit is not restored for re-borrowing.
Why Is the RBI Making This Move?
The central bank's primary goal appears to be enhancing regulatory oversight and promoting credit discipline. By pushing for a term loan structure, the RBI ensures that every new disbursal requires a fresh assessment of the borrower's financial situation. This prevents a scenario where a borrower might continuously rely on redrawing from a flexi-loan to manage cash flow, potentially masking underlying financial stress. The move is part of a broader push for fair lending practices, which also includes recent rules standardizing how lenders can apply penal charges for defaults. The RBI's intent is to ensure penalties are for discipline, not for revenue enhancement, and that all loan terms are transparent.
How Will This Impact Borrowers?
For borrowers, the changes are a mixed bag. On one hand, the new rules could offer greater protection. By forcing a move away from revolving credit, the framework could prevent individuals from falling into debt traps where they continually draw funds to service existing obligations. It promotes more structured repayment habits. On the other hand, it removes a significant amount of flexibility. Many small businesses and self-employed professionals rely on overdraft or flexi-loan facilities for working capital, drawing funds only when needed and minimizing interest costs. Under the new system, they might have to take out a larger term loan in advance and park the unused funds, potentially incurring higher overall borrowing costs.
The Effect on NBFCs and the Lending Market
NBFCs have built significant business models around flexi-loan products. These loans improve customer retention, as a pre-approved limit encourages borrowers to return to the same lender. They also support the growth of Assets Under Management (AUM), since the loan book depletes more slowly when customers can redraw funds. The proposed ban could therefore impact AUM growth, profitability, and customer stickiness for major players in the sector. Industry experts suggest that NBFCs will likely make representations to the RBI, arguing for the flexibility these products provide customers. One potential outcome could be a shift in demand towards credit cards, which are exempt from the proposed ban.
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. The final regulations may differ from the current proposal. Experts are also watching to see if the rules will apply to existing loans or only to new ones, a process known as grandfathering, which could soften the immediate impact. For now, the proposal signals a clear direction from the RBI: a move towards more structured, transparent, and periodically assessed lending to ensure the stability of the financial system and protect consumer interests.
