The RBI's New Regulatory Blueprint
The Reserve Bank of India has released draft amendments that aim to bring more clarity and discipline to how NBFCs extend credit. The central proposal is to restrict NBFCs to offering only 'term loans' and prohibit them from providing 'revolving credit'
facilities. This is a significant change, as it formally defines these two types of lending for the first time within NBFC regulations. A term loan is defined as a loan with a fixed amount and a set repayment schedule, where the credit limit cannot be reused once paid back. Any product that doesn't fit this description would be considered revolving credit. The only exception to this proposed ban are NBFCs specifically authorised by the RBI to issue credit cards, as revolving credit is an essential feature of that product.
Decoding 'Repeat Borrowing' and Revolving Credit
The practice at the heart of the RBI's focus is often seen in products like 'flexi loans' or digital lines of credit. In these arrangements, a customer is given a credit limit and can draw funds, repay them, and then draw funds again from the same sanctioned limit without a new application process. This 'draw, repay, redraw' cycle is the essence of revolving credit. While convenient for borrowers, the RBI is concerned about the underlying risks. The proposed rules would effectively end this model for most NBFCs. Under a term-loan-only structure, once a portion of the principal is repaid, that amount cannot be borrowed again. A new loan would require a fresh assessment and disbursal.
The Hidden Risk of 'Evergreening'
A primary motivation behind the RBI's move is to clamp down on the potential for 'evergreening' of loans. Evergreening is a practice where lenders mask bad loans by allowing a borrower who is struggling to repay to take out a new loan to cover the payments of the old one. Revolving credit facilities can inadvertently facilitate this, as new drawdowns can be used to service existing debt, making the loan appear healthy when it might be under stress. By enforcing a strict term-loan structure with a clear amortisation schedule, the RBI aims to ensure that repayments reflect the borrower's actual cash flow and financial health, not just recycled credit. This push for transparency has been a consistent theme in recent RBI regulations concerning both banks and NBFCs.
The Impact on NBFCs and Their Customers
For NBFCs, especially those with significant exposure to flexi-loan products, the changes could be substantial. Some of the largest players in the market have a considerable portion of their loan book in such products. The new rules could impact loan growth, as the convenience of reusable credit lines often drives customer acquisition and retention. Lenders will likely need to redesign their products and shift customers to new structures. For borrowers, particularly MSMEs and self-employed individuals who rely on flexible working capital loans, the change could mean less convenience. Some analysts argue that shifting to a term-loan-only model might force borrowers to take out larger loans than immediately necessary and incur higher interest costs.
What Happens Next?
The RBI has invited feedback on the draft proposals from stakeholders until August 28, 2026. NBFCs are expected to make representations, arguing for the utility of their current products while looking for ways to adapt. The market has already reacted to the news, with the stock prices of some major NBFCs seeing a decline following the announcement. The final guidelines will determine the long-term impact. The move is part of a broader regulatory trend by the RBI to align the oversight of large NBFCs more closely with that of commercial banks, ensuring greater stability across India's financial system. While it may create short-term disruption, the ultimate goal is a more resilient and transparent lending ecosystem.
