The End of Revolving Credit for NBFCs?
The core of the RBI's proposal, issued in early August 2026, is a major restriction on the types of loans NBFCs can offer. The draft rules propose to prohibit NBFCs from offering revolving credit facilities, allowing them to only provide fixed-term loans.
A term loan is defined as having a fixed principal amount and a predetermined repayment schedule; once repaid, the credit line is not replenished. Any product that doesn't meet this definition, such as flexible credit lines where borrowers can draw, repay, and redraw funds, would be considered revolving credit and subsequently banned for most NBFCs. This move is set to drastically alter popular products like flexi-loans and digital credit lines often provided by NBFCs and their fintech partners.
Why the RBI is Making This Change
This proposal is not a sudden development. Industry experts note that the RBI has been informally guiding NBFCs away from revolving credit for the past two years, aiming to create a clearer distinction between the lending activities of banks and non-banks. The primary rationale behind the move is to enhance financial stability and regulatory oversight. Unlike banks, which have access to short-term liquidity through deposits, NBFCs' funding structures are different, making revolving credit products potentially riskier from an asset-liability management perspective. The RBI's directive aims to curb risks of evergreening, where new credit is used to pay off existing debt, and to ensure that working capital financing remains predominantly the domain of the banking sector.
The Impact on Lenders and Fintech
The immediate effect on NBFCs could be significant. Lenders like Bajaj Finance and Tata Capital, which have popular flexi-loan products, may need to completely redesign their offerings. Analysts predict this could impact customer acquisition and retention, as the flexibility of revolving credit is a key draw. It may also affect AUM growth, as term loans run down faster without the ability for customers to redraw funds. The rules could also disrupt the fintech ecosystem, as many 'buy now, pay later' (BNPL) and digital credit line apps are powered by NBFCs offering revolving credit. While the rules provide an exception for NBFCs explicitly authorised to issue credit cards, like SBI Card, this covers only a very small fraction of the industry.
What It Means for Borrowers
For consumers and small businesses, the change means less flexibility. The convenience of a pre-approved credit line for emergencies or variable expenses may disappear from NBFC offerings. All future borrowing from NBFCs will likely be structured as a standard EMI-based term loan. If you repay a portion of your loan, that amount will not become available to borrow again automatically. While this promotes more disciplined borrowing, it also removes a valuable tool for managing short-term cash flow needs. Borrowers who rely on NBFC-backed fintech credit lines are advised to check the terms and consider building alternative emergency buffers, such as a bank overdraft facility.
The Road Ahead
The RBI has invited feedback from stakeholders on the draft amendments by August 28, 2026. The industry is expected to push back, not necessarily on the entire premise, but to ask for nuance. Some lenders plan to recommend a distinction between unsecured consumer revolving credit and secured facilities, arguing that a blanket ban is unfair to certain borrower segments who use credit lines backed by securities. There is also a lack of clarity on whether supply-chain financing, which often functions like a revolving facility, will be affected. The final shape of these regulations will determine the future landscape of credit in India, likely leading to a more stable, but less flexible, non-banking financial sector.
