De-mystifying the Proposed Rule
The RBI has put forward a draft proposal that primarily restricts Non-Banking Financial Companies (NBFCs) to offering only term loans. A term loan involves a fixed amount of money given to a borrower, which is then repaid over a pre-agreed schedule. The crucial
part of the new proposal is that once a borrower repays a part of the loan, that repaid amount cannot be borrowed again from the same loan account. The sanctioned limit does not get restored upon part-repayment. This essentially means if you have a term loan and pay back a portion of the principal, that portion is considered closed. This move is designed to make loan structures more transparent and predictable. The only exception to this rule would be for NBFCs that are specifically authorised by the RBI to issue credit cards.
What is Revolving Credit?
Think of a credit card or a business line of credit—that's revolving credit in action. It’s a flexible type of loan where you are approved for a certain credit limit. You can draw funds as you need, repay them, and then borrow them again without having to re-apply. The available credit replenishes as you pay down your balance, which is why it's called 'revolving'. For example, if you have a ₹1 lakh limit, spend ₹30,000, and then repay that ₹30,000, your full ₹1 lakh limit is available to you again. This type of credit is ideal for managing ongoing or fluctuating cash flow needs.
The Core Distinction: Fixed vs. Flexible
The main difference between the RBI's proposed structure for NBFCs and revolving credit lies in one word: reusability. The proposed rule mandates that NBFC loans operate like traditional term loans—a one-time disbursement that gets paid down over time. Once a part of the principal is repaid, it cannot be drawn again. Revolving credit, on the other hand, is built on the principle of a reusable credit line. You can borrow, repay, and re-borrow funds repeatedly up to your limit. The RBI's proposal seeks to end this revolving door for most NBFC loan products, pushing them towards a more structured, fixed-term lending model. Some popular 'flexi-loan' products, which operate on a revolving basis, could be significantly impacted by this.
Why This Difference Matters for Borrowers
For borrowers, this change brings both pros and cons. The primary benefit is clarity. A term loan has a predictable repayment schedule and a clear end date, making it easier to manage personal finances. There are no surprises, as the loan amount systematically decreases. This also aligns with other RBI directives aimed at protecting customers from complex loan structures and hidden charges. However, the flexibility offered by revolving credit will be lost for many NBFC customers. Small businesses and individuals who rely on flexi-loans for managing irregular cash flows may need to find alternative financing options, as they will no longer be able to dip back into their loan account after making repayments.
The Impact on NBFCs and Their Products
This proposal could significantly reshape how many NBFCs operate. Lenders that have built their business models around flexible, revolving loan products will need to re-engineer their offerings to comply with the new term-loan-only structure. Analysts note that some large NBFCs have a notable portion of their assets under management in revolving credit facilities, making them particularly exposed to this change. The shift is intended to enhance regulatory oversight and align NBFCs more closely with the stricter lending norms of banks. While the draft is still open for feedback, its implementation would force a fundamental change in product design and customer engagement for a large segment of India's non-bank lending sector.
