The RBI's New Blueprint
The Reserve Bank of India has released a draft circular that takes aim at a popular form of credit offered by Non-Banking Financial Companies (NBFCs). The proposal suggests that NBFCs should stop offering revolving credit facilities and instead, all their
lending should be in the form of fixed-term loans. This move could significantly reshape the product offerings of many fintech lenders and retail-focused NBFCs. The draft, which is currently open for industry feedback, makes a clear distinction: the only NBFCs exempt from this rule would be those specifically licensed by the RBI to issue credit cards, for whom revolving credit is an inherent feature. For everyone else in the NBFC space, the era of flexible, reusable credit lines may be coming to a close.
Revolving Credit vs. Term Loans
To understand the gravity of this change, it is crucial to know the difference between these two lending models. A revolving credit facility works like a credit card: you are given a total credit limit which you can draw from, repay, and draw from again as needed. Many 'Buy Now, Pay Later' (BNPL) schemes and digital credit lines operate on this principle. A term loan, on the other hand, is a more traditional form of credit. A fixed amount is disbursed, and you repay it over a predetermined schedule through EMIs. Once you repay a portion of the principal, you cannot re-access that amount; the credit line does not replenish. The RBI's proposal is to push all NBFC lending, besides credit cards, into this more structured, one-time loan format.
Why the RBI is Pushing This Change
The regulator’s primary motive appears to be risk management and increased transparency. This move is part of a broader trend by the RBI to tighten oversight on the rapidly growing digital lending sector. Revolving credit lines, particularly those with little oversight, can sometimes mask underlying stress. There are concerns about 'evergreening' risks, where borrowers might use fresh drawdowns from their flexible credit line to pay off existing dues, rather than generating genuine cash flows to service the loan. By mandating fixed-term loans with clear amortisation schedules, the RBI aims to create a more transparent credit environment where the loan's health is easier to track for both the lender and the regulator, ultimately protecting consumers from potential debt traps.
The 'Money Question' for NBFCs
This is where the headline's 'key money question' comes into play. For NBFCs and the fintechs they partner with, the business model is at stake. Revolving credit products, often called 'flexi-loans', are incredibly popular and profitable. They offer higher yields—typically 0.25% to 0.75% more than conventional loans—and generate fee income through annual charges. More importantly, their flexibility makes them a powerful tool for customer acquisition and retention, encouraging repeat use. Shifting to a term loan model introduces friction. A customer needing more funds would have to apply for a fresh loan each time, a far less convenient process. This could lead to slower loan growth, lower fee income, and compressed profit margins, a reality that saw the stock prices of major NBFCs tumble after the draft was announced.
What Does This Mean for You?
For the average consumer, the impact is a trade-off between flexibility and safety. The convenience of tapping into a pre-approved credit line for small, recurring expenses might diminish. Your favourite payment app that offers a credit-on-UPI feature backed by an NBFC might have to change how it works. However, the upside is greater clarity and protection. A fixed-term loan comes with a clear statement of costs and a defined end date, making it easier to manage your finances and avoid the cycle of borrowing to repay. The final rules will likely determine if existing loans will be grandfathered in, but for new borrowers, the world of digital credit in India is poised for a significant structural shift.
