The Current System: A Source of Confusion
Currently, if you have a flexible loan or a credit line from an NBFC, making a part-payment doesn't always mean your available credit limit increases by the same amount. These products, often called 'flexi-loans' or overdraft facilities, allow borrowers
to draw, repay, and then re-draw funds up to a sanctioned limit. However, the restoration of this limit after repayment can be inconsistent and confusing. For many borrowers, especially those using these lines for business or emergency needs, this lack of a standard rule creates uncertainty. You might repay a significant portion of your outstanding balance expecting to free up that credit, only to find the available limit hasn't changed as you anticipated. This ambiguity can disrupt financial planning and is one of the key issues the RBI aims to address.
What the RBI Is Proposing
The RBI has issued draft directions that aim to standardize lending practices for NBFCs. The central proposal is to move away from these revolving credit facilities and toward more structured term loans. Under the proposed framework, all lending by NBFCs (excluding specifically authorized credit cards) would have to be in the form of term loans with a fixed repayment schedule. Critically, this means that once a part of the principal is repaid, that portion of the sanctioned limit cannot be automatically replenished for the borrower to draw again. The idea is to make the loan a one-way street: the amount is disbursed, and the borrower repays it over a set tenure. Any new credit would require a fresh assessment and disbursement from the lender. This would effectively end the 'flexi-loan' model as it currently exists for NBFCs.
A Practical Example of the Change
Let's illustrate the difference. Suppose you have a flexi-loan from an NBFC with a total limit of ₹2,00,000. You use ₹50,000, leaving you with an available limit of ₹1,50,000. A month later, you make a part-payment of ₹20,000. Under the current revolving system, that ₹20,000 would typically be added back to your available credit, allowing you to borrow it again and bringing your available limit up to ₹1,70,000. However, under the RBI's proposed rules, this would change. After you repay the ₹20,000, your outstanding loan would decrease, but your sanctioned limit would not be replenished. The credit line would not revolve. To get more funds, you would need to apply for a new loan, rather than simply drawing from the old limit.
Why Is the RBI Making This Change?
The primary goal behind these draft rules is to increase transparency and reduce certain risks in the lending system. Regulators are concerned that revolving credit lines can sometimes mask a borrower's true financial stress. There is a risk of 'evergreening', where a borrower might draw fresh funds from their credit line just to make interest payments on the same loan, creating a cycle of debt without actually improving their financial position. By moving to fixed-term loans with clear amortization schedules, the RBI aims to ensure that both lenders and borrowers have a much clearer picture of the loan obligations. This move is part of a broader push for greater consumer protection and financial stability, ensuring that lending products are straightforward and their costs are transparent from the start.
What This Means for Borrowers
If these draft rules are finalized, borrowers who rely on the flexibility of NBFC credit lines will need to adjust. The convenience of drawing and repaying from a single, continuous credit line will likely disappear. This will particularly affect self-employed individuals and small businesses that use these products to manage fluctuating cash flows. On the other hand, the change will bring greater predictability. Borrowers will have a clear, fixed repayment schedule, which can make budgeting easier and prevent the debt from spiraling. It also forces a more disciplined approach to borrowing, as getting additional funds will require a formal application process rather than a simple tap on an app.
What Happens Next?
It is important to remember that these are currently draft proposals. The RBI has invited comments and feedback from stakeholders, including NBFCs and the public, until August 28, 2026. Following this consultation period, the RBI will review the feedback and may issue final guidelines, which could be the same as the draft or be modified. If the rules are implemented, the RBI will likely provide a transition period for NBFCs to adapt their products and for existing loans to be managed. Borrowers should keep an eye on official announcements from the RBI to understand how their existing and future loans will be affected.
