What Are the New Draft Rules?
In early August 2026, the Reserve Bank of India (RBI) issued draft amendments that target how Non-Banking Financial Companies (NBFCs) can offer credit. The central bank has proposed that NBFCs should primarily offer term loans, which have a fixed principal
amount and a predetermined repayment schedule. Crucially, the draft rules seek to prohibit NBFCs from offering revolving credit facilities—flexible loans where borrowers can draw, repay, and re-borrow funds up to a certain limit. This restriction would not apply to the few NBFCs authorised by the RBI to issue credit cards, for which revolving credit is a core feature. The regulator has invited feedback on these proposals until August 28, 2026, signaling a desire for industry consultation before finalizing the rules.
The Core of the Confusion: Term Loan vs. Revolving Credit
The headline issue is the RBI's clear distinction between a 'term loan' and 'revolving credit'. According to the draft, a term loan's sanctioned limit cannot be restored or replenished even if a borrower repays the principal amount in part or in full. Any credit facility that doesn't fit this definition is considered revolving credit. This directly impacts the popular 'flexi loan' products offered by many NBFCs. Currently, if a customer takes a flexi loan of ₹1 lakh and repays ₹20,000, that ₹20,000 often becomes available for them to borrow again. The new proposal would end this practice for NBFCs, effectively turning these flexible credit lines into one-time term loans for each withdrawal.
Why This Distinction Matters Immensely
This proposed change carries significant consequences for both lenders and borrowers. For NBFCs, flexi loans are a major driver of customer acquisition and retention. The ability to redraw funds keeps customers within the lender's ecosystem and supports faster growth of their assets under management (AUM). The move is seen by analysts as a way for the RBI to curb potential risks like evergreening, where fresh drawdowns might be used to service existing debt rather than reflecting genuine cash flow. For borrowers, especially in the MSME and unsecured personal loan segments, the flexibility of revolving credit is a key feature, allowing them to manage cash flow without applying for a new loan each time. Shifting entirely to term loans could mean higher borrowing costs, as customers might have to borrow funds in advance and hold them until needed.
Industry's Perspective and Pushback
The financial industry's reaction has been swift. While some acknowledge that the RBI has been signaling a preference for banks to handle working capital and revolving credit for some time, there are widespread concerns. Lenders argue that a blanket ban on revolving credit for NBFCs is too restrictive. Industry bodies are expected to make representations to the RBI, arguing that these products offer crucial flexibility to borrowers. One suggestion is to differentiate between unsecured and secured revolving credit, perhaps allowing the latter to continue. Analysts at Morgan Stanley noted that while NBFCs may need to redesign their products, the impact could be manageable if the rules are applied consistently and existing loans are grandfathered.
The Link to Credit on UPI
These draft rules for NBFCs arrive after the RBI has already taken steps to formalize how pre-sanctioned credit lines operate through the Unified Payments Interface (UPI). In circulars from 2023 and 2026, the RBI clarified that any credit extended via UPI must adhere to the same prudential norms as the underlying loan product. Essentially, using UPI as the payment channel does not create a new category of loan. The new draft rules for NBFCs are the other side of this coin—defining exactly what kind of underlying loan products NBFCs are permitted to offer in the first place. By pushing NBFCs towards fixed-term loans, the RBI is clarifying that any future NBFC-offered credit on UPI must also follow this non-revolving structure.
