Understanding the Current Landscape
For years, many NBFCs have offered products that are a hybrid between a traditional loan and a credit card. Known as 'flexi-loans' or revolving credit lines, they provide customers with a sanctioned credit limit. Borrowers can draw funds as needed, repay
a portion, and then draw that repaid amount again without having to re-apply for a new loan. This offers immense flexibility for both individuals managing fluctuating expenses and small businesses handling cash flow. For NBFCs, these products have been a powerful tool for customer acquisition and generating repeat business and fee income, with some major players having a significant portion of their loan book in such facilities.
What the RBI Is Proposing
The RBI's draft circular, issued in August 2026, aims to put a stop to this practice for most NBFCs. The proposal mandates that NBFCs can only offer credit in the form of 'term loans'. The draft explicitly defines a term loan as a facility with a fixed principal amount and a pre-determined repayment schedule. Crucially, once a part of the principal is repaid, the borrower's credit limit is not restored. Essentially, any drawdown would be a one-time affair under that specific loan agreement. The only exception to this proposed rule would be for NBFCs that are specifically authorised by the RBI to issue credit cards, as revolving credit is an inherent feature of that product.
The Regulator's Rationale
The RBI's primary motivation appears to be risk management and curbing a practice known as 'evergreening'. Evergreening happens when fresh credit is extended to a stressed borrower to help them repay an existing loan, which can mask the true level of bad loans (Non-Performing Assets) in the financial system. By allowing borrowers to repeatedly draw from a credit line, the current structure can make it difficult to assess if a borrower is genuinely repaying their debt or simply shuffling funds. The proposed rules would force a fresh credit assessment for each new borrowing, giving lenders better visibility into a borrower's financial health and preventing potential stress from building up unnoticed.
Impact on NBFCs
The impact on NBFCs could be substantial, particularly for those with a large portfolio of flexi-loan products. Lenders like Bajaj Finance have seen their stock prices react to the news due to their perceived high exposure. The draft rules could slow loan growth, as the added 'friction' of applying for a new term loan for every need might deter some customers. It could also compress fee income, which is often generated from repeated drawdowns. NBFCs would need to redesign their products and processes, potentially increasing their operational costs. Furthermore, it could create a competitive disadvantage against banks, which are not subject to the same proposed restrictions and can continue offering overdraft facilities.
What This Means for Borrowers
For customers, the proposed change is a double-edged sword. On one hand, the convenience of a flexible credit line to manage unpredictable cash flow needs would be lost. A small business owner or a salaried individual might have to borrow a larger lump sum than immediately needed, potentially incurring higher interest costs on the unused funds. On the other hand, the regulations aim to foster greater financial discipline. By requiring a separate approval process for each loan, the rules might protect borrowers from taking on excessive debt and ensure that both the lender and borrower are making a considered decision each time credit is extended.
