The RBI's New Blueprint
The Reserve Bank of India has released draft amendments that would require Non-Banking Financial Companies (NBFCs) to exclusively offer term loans, effectively barring them from providing revolving credit facilities. The proposal, open for public feedback
until August 28, 2026, introduces formal definitions for 'term loan' and 'revolving credit' for the first time under NBFC regulations. A term loan is defined as a credit facility with a fixed amount and a predetermined repayment schedule; once the principal is repaid, the credit line is closed. Any facility that doesn't meet this definition, allowing borrowers to draw, repay, and reuse funds within a limit, is considered revolving credit.
Why the Change?
The central bank's primary motivation appears to be strengthening regulatory oversight and mitigating systemic risk within the rapidly growing NBFC sector. By enforcing a shift to term loans, the RBI aims to create clearer distinctions in loan structures. Analysts suggest the move is also intended to curb the risks of evergreening, where fresh drawdowns on a revolving credit line might be used to service existing debt rather than reflecting genuine cash flow. The proposed framework builds on existing directions from 2025, aiming for a more consistent regulatory environment for non-bank lenders. This initiative is seen as a proactive step to address potential vulnerabilities like asset-liability mismatches, which are less suitable for NBFCs that lack access to short-term funds like CASA deposits that banks have.
Impact on Popular Loan Products
If implemented, these rules would significantly impact several popular lending products. 'Flexi loans', overdraft-style facilities, and digital lines of credit offered by many retail-focused NBFCs and fintech partners would likely need to be redesigned or discontinued. These products, which allow customers flexibility by letting them draw and repay funds multiple times against a sanctioned limit, would be classified as revolving credit and thus prohibited. The only exception would be for NBFCs specifically authorised by the RBI to issue credit cards, as revolving credit is an inherent feature of that product. This has caused concern for companies with significant portfolios in flexi-loan products.
Effects on Lenders and Borrowers
For NBFCs, the proposed changes could disrupt business models, impacting new customer acquisition and fee income associated with revolving credit products. Lenders may need to restructure their offerings completely. For borrowers, especially in the MSME and unsecured personal loan segments, the flexibility of revolving credit could disappear. They may have to shift to term loans, which could mean borrowing funds in advance and incurring higher interest costs. However, some analysts believe the impact can be managed if lenders redesign their products or shift customers to alternative structures. The rules would not affect loans already structured as term loans, such as vehicle financing, housing loans, and standard gold loans.
Next Steps and Industry Reaction
The RBI has invited comments from stakeholders on the draft amendments until August 28, 2026. Following this consultation period, the central bank will issue the final guidelines, which will come into effect immediately upon notification. NBFCs are expected to make representations to the RBI, arguing for the flexibility that revolving credit products offer borrowers. Industry players are also seeking clarity on whether products like supply-chain financing will be classified as revolving credit. The final shape of the regulations will depend heavily on the feedback received and the RBI's ultimate goal of balancing financial stability with credit availability.
