Understanding Revolving Credit and Term Loans
Before diving into the changes, it's crucial to understand two fundamental types of credit. A term loan is a loan for a fixed amount with a fixed repayment schedule. Think of a car loan or a home loan; you borrow a set amount and pay it back in EMIs over
a specific period. Once you repay a part of it, you cannot re-borrow that amount. In contrast, revolving credit gives you a credit limit you can borrow from, repay, and borrow from again. Credit cards are the most common example. Many Non-Banking Financial Companies (NBFCs) and fintech platforms offer 'flexi loans' or credit lines that operate on this principle. You might have a sanctioned limit of ₹1 lakh, use ₹50,000, repay ₹20,000, and your available limit adjusts accordingly, allowing you to draw more funds when needed.
What the RBI is Proposing
The RBI's draft circular, released in early August 2026, proposes a major shift. It suggests that NBFCs should only be allowed to offer term loans. This means that any credit facility where the limit can be restored or replenished after a part-payment would be prohibited for most NBFCs. In simple terms, if this rule is finalised, the 'revolving' nature of many NBFC-offered credit products would cease. Once you repay a portion of your loan, that amount will not be available for you to borrow again from the same sanctioned limit. Each new borrowing would essentially require a new loan process. The public and stakeholders have been invited to provide feedback on these draft norms until August 28, 2026.
The Rationale Behind the Change
The central bank's primary objective appears to be aligning prudential norms across the financial ecosystem and reducing systemic risk. These revolving credit products, while convenient for consumers, can sometimes mask a borrower's true debt burden. The regulator is likely concerned about the potential for 'evergreening', where borrowers might use fresh drawdowns from a flexi-loan to service existing debt, rather than using genuine cash flow. By converting these facilities into structured term loans, the RBI aims to enforce greater repayment discipline on the part of borrowers and promote more transparent and responsible lending practices among NBFCs. This aligns with a broader trend of tightening oversight on unsecured consumer credit.
Who Is Affected and Who Is Exempt?
These draft rules are specifically for NBFCs. This means traditional banks are not covered by this proposal. The products most likely to be impacted are the popular 'flexi loans', digital credit lines, and many 'Buy Now, Pay Later' (BNPL) schemes that are powered by NBFC credit lines in the background. However, there is a key exception: the new restrictions will not apply to NBFCs that are specifically authorised by the RBI to issue credit cards. Currently, only a few NBFCs, like SBI Cards and BoB Cards, have this authorisation. Therefore, your NBFC-issued credit card will likely continue to function as a revolving credit instrument.
What This Means For Borrowers
If you rely on an NBFC flexi-loan for your financial needs, the biggest change will be the loss of convenience. Let's say you have a ₹5 lakh flexi-loan. You use ₹3 lakh and then repay ₹1 lakh. Currently, you could borrow that ₹1 lakh again. Under the new rules, you wouldn't be able to. Your loan would be treated as a term loan with a declining principal. This could force borrowers to be more disciplined with their spending and repayments. On the other hand, it might reduce the easy availability of emergency funds for those who depend on these credit lines. It also means that for new funding needs, you might have to go through a fresh application process for a new term loan, which could be less convenient.
