What the RBI is Proposing
In early August 2026, the Reserve Bank of India issued a draft proposal that could significantly alter the landscape for Non-Banking Financial Companies (NBFCs). The central bank has suggested that NBFCs should primarily offer 'term loans'—loans with
a fixed repayment schedule and amount. More importantly, the proposal aims to restrict NBFCs from offering 'revolving credit' facilities, with an exception for officially issued credit cards. This means that once a borrower repays a portion of their loan, that amount cannot be drawn again from the same credit line. This draft, which is open for comments, targets the very structure of many popular loan products in the market.
Revolving Credit Explained
To understand the impact, we first need to define revolving credit. Think of a credit card. You have a total credit limit, and you can borrow, repay, and re-borrow funds as long as you stay within that limit. Many NBFCs have offered similar products, often branded as 'Flexi loans' or digital lines of credit. These products are convenient for managing fluctuating cash flow needs; you draw money when you need it and repay when you can, and the credit line remains open for future use. Interest is typically charged only on the amount you have actually used, not the entire sanctioned limit. The key feature is this continuous cycle of borrowing and repayment.
The Alternative: A Standard Term Loan
A term loan is what most people consider a traditional loan. A lender provides a specific lump sum of money upfront, and the borrower agrees to pay it back in regular, fixed installments (EMIs) over a pre-agreed period, or tenure. The repayment schedule is predictable, making it easier for financial planning. Unlike revolving credit, a term loan has a clear end date. Once you have paid off the entire amount, the loan account is closed. To borrow more money, you would need to apply for a completely new loan. The RBI's proposal pushes NBFCs squarely in this direction, favouring structure and predictability over flexibility.
The Practical Difference for Borrowers
The proposed change from a revolving to a term-based structure has a direct impact on your debt. With a flexi or revolving loan, when you make a repayment, it replenishes your available credit limit. This can create a temptation to draw funds again, potentially keeping you in a cycle of debt. Under the proposed term loan structure, every rupee you repay goes towards permanently reducing your outstanding principal. Your sanctioned limit does not get restored. This enforces a more disciplined approach to repayment, ensuring that you are consistently working towards closing the loan rather than just managing a credit line.
The Power of Penalty-Free Part-Repayments
This is where the 'part-repayment' aspect of the headline becomes crucial. In a separate but related move, the RBI has solidified rules that prohibit lenders from charging prepayment penalties or foreclosure charges on floating-rate loans given to individual borrowers for non-business purposes. These directives are set to be firmly in place from January 2026. When you combine the two RBI initiatives, a powerful benefit emerges. If NBFCs must now offer structured term loans (as proposed), and those loans have a floating interest rate, you gain the ability to make extra payments (part-repayments) whenever you have surplus cash, without any penalty. This allows you to reduce your principal faster, save a significant amount on total interest, and close your loan ahead of schedule.
