The Proposal: Term Loans In, Revolving Credit Out
The Reserve Bank of India (RBI) released a draft proposal in early August 2026 that aims to streamline lending by NBFCs. The core of the proposal is simple but impactful: it suggests prohibiting NBFCs from offering 'revolving credit' facilities and allowing
them to offer only 'term loans'. The only exception would be for NBFCs specifically authorised to issue credit cards, as revolving credit is a fundamental feature of that product. To understand this, it's crucial to know the difference. A term loan involves a fixed amount disbursed to a borrower, which is then repaid on a pre-decided schedule. Once you repay a part of the principal, you cannot draw that money again. In contrast, revolving credit—the engine behind flexi-loans, digital credit lines, and many 'Buy Now, Pay Later' products—allows a borrower to draw, repay, and re-draw funds up to a sanctioned limit without a new application each time. This draft, if finalized, would require many popular lending products to be completely redesigned.
Why is the RBI Making This Change?
This move is part of the RBI's broader push for greater transparency and discipline in the financial sector. While flexi-loans offer convenience, they can also mask a borrower's underlying financial stress. The regulator's primary goal appears to be to ensure that a lender assesses a borrower's creditworthiness every time fresh funds are disbursed. Under a revolving credit system, a borrower could potentially draw new funds to make payments on the old loan, a practice that can hide developing financial trouble. By shifting to a term-loan-only model, every request for new money would trigger a fresh assessment and a new loan agreement. This prevents the casual 'topping up' of loans and gives the regulator better visibility into borrower leverage. It is a firm step against the risk of 'evergreening', where a loan is kept from being classified as a default by refinancing it with a new one.
What This Means for Borrowers
For millions of individuals and small businesses who rely on the flexibility of NBFC credit, the impact could be significant. The primary casualty would be convenience. Products like flexi-personal loans, MSME working capital overdrafts from NBFCs, and digital lines of credit would likely vanish in their current form. If you need additional funds, you would have to go through a full application process for a new term loan, instead of simply drawing from an existing limit. This could also impact borrowing costs. As some analysts have noted, borrowers might be forced to take out larger term loans than immediately needed to create a buffer, paying interest on unused funds. The days of having a standby credit line from an NBFC for emergencies or fluctuating business needs might be coming to an end, pushing borrowers to plan their credit needs more rigidly.
How NBFCs and the Lending Market Will Adapt
This proposal has caused a stir in the lending industry. NBFCs, especially those heavily invested in retail and MSME finance, have built successful models around flexi-loan products. These products are attractive because they improve customer loyalty and support sustained growth of the loan book, as the loan balance doesn't run down as quickly. If the rules are finalised, these companies will have to re-engineer their offerings. However, the impact may be managed if the rule applies uniformly across the industry, creating a level playing field. Lenders may pivot to offering quicker, smaller, sequential term loans to mimic the convenience of a credit line. Furthermore, since credit cards are exempt, some of this demand for flexible credit may shift towards banks and NBFCs that are licensed card issuers, potentially benefiting players like SBI Cards.
What Happens Next?
It is crucial to remember that these are draft guidelines. The RBI has invited feedback from stakeholders, including NBFCs and the public, until August 28, 2026. The industry is expected to make strong representations, highlighting the importance of flexible credit products for borrowers. The central bank will consider this feedback before issuing final directives. It's possible the final rules could include modifications, such as allowing existing flexi-loans to continue until their tenure ends, a process known as 'grandfathering'. Regardless of the final outcome, the proposal signals the RBI's clear direction: towards a lending environment with more checks, greater transparency, and less ambiguity.
