The RBI's New Proposal: A Shift to Term Loans
The Reserve Bank of India (RBI) has issued draft directions that could significantly alter the lending landscape for Non-Banking Financial Companies (NBFCs). The proposal suggests that NBFCs, unless specifically licensed to issue credit cards, should
primarily offer loans structured as 'term loans'. This move is aimed at standardising credit products and enhancing regulatory oversight. In essence, the RBI wants to create a clearer distinction between different types of credit facilities offered to consumers and businesses. The draft rules formally define what constitutes a term loan, setting it apart from other, more flexible forms of credit that have become popular.
Understanding the Proposed 'Term Loan' Structure
Under the RBI's proposed framework, a term loan is defined by two key characteristics. First, it has a fixed sanctioned amount that is repaid according to a pre-determined schedule, whether through periodic EMIs or a single bullet repayment. Second, and more crucially, once a part of the loan principal is repaid, the borrower’s credit limit is not automatically restored. For example, if you take a loan of ₹1 lakh and repay ₹20,000, you cannot simply redraw that ₹20,000 later. The sanctioned limit does not replenish. To get more funds, a borrower would likely need to go through a fresh assessment and get a new loan. This structure provides a clear start and end to the loan, with a predictable repayment journey.
The Familiar Concept: What is Revolving Credit?
Revolving credit is a financial product most people are familiar with through credit cards. It is a flexible line of credit with a pre-set limit that you can draw from, repay, and draw from again. Think of it as a reusable pool of funds. If you have a credit card with a ₹1 lakh limit and spend ₹30,000, your available credit becomes ₹70,000. Once you repay the ₹30,000, your full ₹1 lakh limit is restored and available for use again. This cycle can continue as long as the account is in good standing. The key features are the ability to borrow repeatedly without a new application and the flexibility to pay the full balance or a minimum amount each month.
The Core Difference: Structure vs. Flexibility
The fundamental difference between the RBI’s proposed term loan structure and revolving credit lies in the replenishment of the credit limit. The RBI's proposal explicitly states that for term loans, a repaid principal amount cannot be re-borrowed. This creates a closed-end loan. In contrast, revolving credit is open-ended; the credit limit refreshes as you repay, allowing for continuous borrowing. Many NBFCs currently offer 'flexi loans' which operate like revolving credit, allowing customers to withdraw and repay funds within a sanctioned limit. The new rule would effectively prohibit these flexi products for NBFCs not authorised to issue credit cards, forcing them into the more rigid term loan structure.
Why This Distinction Matters to Borrowers
This proposed change has significant implications for both lenders and borrowers. For borrowers, particularly small business owners and self-employed individuals who rely on the flexibility of flexi loans for managing cash flow, the change could be inconvenient. Accessing additional funds would require a new loan application rather than a simple drawdown from an existing credit line. For NBFCs, this could impact customer retention and loan growth, as the convenience of reusable credit is a major attraction. The RBI's motive appears to be to bring more discipline and transparency to the lending process, preventing the risk of borrowers getting caught in a cycle of debt with facilities that never have a clear end date, unlike structured term loans.
