The End of Revolving Credit?
The centerpiece of the RBI's draft proposal, issued in early August 2026, is a significant restriction on how Non-Banking Financial Companies (NBFCs) can lend. The draft suggests that NBFCs should only offer term loans, which have a fixed amount and a predetermined
repayment schedule. This would effectively prohibit them from offering revolving credit facilities, where borrowers can draw, repay, and re-draw funds from a sanctioned limit. This restriction would not apply to the few NBFCs explicitly authorized by the RBI to issue credit cards, as revolving credit is a fundamental feature of that product. Products like flexible personal loans and digital credit lines, which have become popular for their convenience, would need to be redesigned to comply. The regulator has invited feedback from stakeholders on these proposed amendments until August 28, 2026.
Why the RBI Is Making This Move
This proposal isn't a surprise to many in the industry; the RBI has reportedly been signaling its preference against revolving credit from NBFCs for the past two years. The primary goal appears to be strengthening consumer protection and reducing systemic risk. Revolving credit lines, if not managed well, can sometimes mask a borrower's true financial stress, allowing debt to be serviced by drawing more credit in a cycle known as 'evergreening'. By mandating fixed-term loans, the RBI ensures that each new disbursal of funds requires a fresh credit assessment of the borrower, providing a clearer picture of their repayment capacity. This move is part of a broader push for a Fair Practices Code, which emphasizes transparency, fair treatment of customers, and robust grievance redressal mechanisms.
Impact on Lenders
For NBFCs, particularly those heavily invested in fintech partnerships and digital lending, the changes could be substantial. The prohibition on revolving credit will force a redesign of popular 'flexi-loan' products. This could slow down loan growth and customer acquisition, as the 'stickiness' of a reusable credit line is a powerful tool for retaining customers. Lenders may see their loan books run down faster without the revolving feature and could face pressure on fee income generated from repeated drawdowns. However, many diversified NBFCs are expected to adapt by restructuring their offerings or shifting customers to other permissible loan structures, mitigating the long-term impact on their earnings. The industry is expected to provide feedback suggesting a distinction between unsecured consumer lending and secured revolving facilities.
What It Means for Borrowers
The draft rules present a double-edged sword for borrowers. On one hand, the changes promise greater protection and transparency. By mandating fixed repayment schedules and eliminating open-ended credit lines, borrowers will have a clearer understanding of their total liability and a defined end date for their loan. This move, combined with other recent RBI guidelines on fair recovery practices, is designed to shield consumers from aggressive tactics and potential debt traps. On the other hand, accessing quick, flexible credit might become more challenging. The convenience of drawing from a pre-approved credit line for immediate needs will likely be replaced by the need to apply for a new term loan each time. This could slow down access to funds and may lead to reduced credit availability for some segments as lenders become more cautious.
A Balancing Act for a Healthier Market
Ultimately, the RBI's proposal is a strategic move to create a clearer distinction between the roles of banks and NBFCs, with banks primarily handling working capital and revolving credit needs. The regulator is trying to strike a difficult balance: fostering financial inclusion and ensuring credit reaches underserved populations, while simultaneously reining in practices that could lead to instability or harm consumers. While the transition may involve short-term disruptions for both lenders and borrowers, the long-term objective is a more resilient and transparent credit ecosystem. The emphasis on fresh credit assessments for each loan promotes better underwriting standards and ensures that credit growth is sustainable, benefiting the entire economy in the long run.
