What is the RBI Proposing?
On August 6, 2026, the RBI released draft amendments that would fundamentally alter how Non-Banking Financial Companies (NBFCs) can lend. The proposal suggests that NBFCs should only be allowed to offer 'term loans' and prohibits them from offering 'revolving
credit facilities'. A term loan is what most people think of as a standard loan: a fixed amount of money borrowed and paid back over a set schedule of EMIs. Once you repay a part of it, you can't re-borrow that amount. In contrast, revolving credit, such as flexi-loans or lines of credit, allows a borrower to draw, repay, and redraw funds multiple times within an approved limit. This is the type of credit the RBI wants to restrict for NBFCs, with an exception for NBFCs specifically authorised to issue credit cards.
Why is the RBI Doing This?
The regulator's primary goal is to enhance financial stability and protect borrowers. The concern is that with revolving credit, it's harder to track a borrower's true financial health. A borrower might be using fresh drawdowns from their credit line to pay the interest on the same loan, a practice known as evergreening. This can mask underlying financial distress until it's too late. By mandating fixed-term loans with clear repayment schedules, the RBI aims to instill greater discipline in lending and borrowing, ensuring that a loan is actually being paid off rather than just being rolled over. This move is part of a broader RBI strategy to align the rules for large NBFCs more closely with those for commercial banks, reducing regulatory gaps.
The Potential Downside for Borrowers
While the intent is to protect the system, the proposal could make it harder for many to access quick and flexible credit. Millions of individuals, self-employed professionals, and small businesses rely on the flexi-loan products and digital credit lines offered by NBFCs and their fintech partners for working capital and emergency needs. For these borrowers, the ability to repay and redraw funds as cash flow permits is a crucial feature. Converting these products into rigid term loans might force borrowers to take larger loans than needed upfront, leading to higher interest costs, or leave them without access to liquidity when they need it most.
Who Will Feel the Impact Most?
The impact won't be uniform. Borrowers with standard housing, vehicle, or personal loans structured as EMIs are unlikely to see any change. The groups most likely to be affected are retail consumers using flexi-personal loans, MSMEs using overdraft-style facilities for working capital, and users of many 'Buy Now, Pay Later' (BNPL) and digital credit line apps, which are often powered by NBFCs offering revolving credit. For these segments, which often include customers who may not have access to traditional bank credit, the change could mean a significant reduction in credit availability and flexibility.
What This Means for NBFCs
For the NBFCs themselves, the draft rules present a major operational challenge. Companies with significant exposure to flexi-loan products will need to redesign their offerings. This could slow down customer acquisition and impact loan growth and fee income, which is often generated from repeated drawdowns on revolving lines. Following the announcement, stock prices of major NBFCs with high exposure to these products, like Bajaj Finance, saw a significant drop. While lenders are expected to adapt by restructuring products, the transition could be disruptive. The industry is likely to provide feedback to the RBI, possibly arguing for a distinction between unsecured and secured revolving credit.
