The RBI's Big Proposal
The Reserve Bank of India has issued draft directions that propose a significant shift in how NBFCs can lend money. The core idea is to restrict NBFCs to offering only 'term loans' and prohibit them from providing 'revolving credit' facilities. The only exception
would be for NBFCs that are specifically authorised by the RBI to issue credit cards, as revolving credit is a fundamental feature of that product. This move is part of a broader effort by the regulator to enhance transparency, strengthen oversight, and create a clearer distinction between the lending products offered by banks and those offered by NBFCs. Stakeholders have been invited to provide feedback on these draft proposals by August 28, 2026.
Term Loan vs. Revolving Credit
To understand the impact, it's crucial to know the difference between these two loan types. A 'term loan' is what most people think of as a traditional loan: you borrow a fixed amount of money and repay it over a set period through scheduled instalments. Once you repay a part of the loan, that's it—the repaid amount cannot be borrowed again. In contrast, 'revolving credit' works like a flexible credit line. A lender sanctions a total limit, and you can withdraw funds, repay them, and then withdraw them again as needed, as long as you stay within your approved limit. This is the model used for many popular 'flexi-loans', digital credit lines, and some Buy Now, Pay Later (BNPL) services offered by NBFCs and their fintech partners.
How Part Repayment Affects Your Credit Limit
This brings us to the central question. Under the current revolving credit or 'flexi-loan' system, if you have a sanctioned limit of ₹2 lakh and you use ₹1 lakh, your available limit is ₹1 lakh. If you then repay ₹50,000, your available limit is restored to ₹1.5 lakh, which you can borrow again. The proposed new rules would end this practice for NBFCs. Under the proposed term-loan-only structure, credit limits would not be restored after repayment. If you take a ₹2 lakh term loan and repay ₹50,000, your outstanding loan is simply reduced to ₹1.5 lakh. You cannot re-borrow that ₹50,000. The sanctioned limit is a one-time facility that gets extinguished as you repay it.
Why the RBI is Proposing This Change
The regulator's motivation appears to be multi-faceted. Firstly, it aims to bring more clarity and discipline to the lending market. Term loans have clear start and end dates and predictable repayment schedules, which can help prevent borrowers from falling into a continuous cycle of debt that can sometimes occur with easily reusable credit lines. Secondly, it reinforces the distinction between banks and NBFCs. Traditionally, providing flexible working capital and overdraft facilities has been the domain of banks. The RBI seems to want NBFCs to focus on fixed-term credit, their core area. This move is seen as a way to manage systemic risk and ensure that loan products are straightforward and transparent for consumers.
Who Will Be Impacted?
The impact of these draft rules, if finalised, will be widespread. Borrowers who rely on the convenience of flexi-loans from NBFCs for managing cash flow, emergencies, or business expenses will need to adapt. Instead of drawing from a pre-approved line of credit, they may have to apply for a new term loan for each new financial need, which could be less convenient. Major NBFCs that have built a significant portion of their business on revolving credit products will need to redesign their loan offerings to comply with the new framework. This change would affect lending across several categories, including unsecured personal loans and credit extended to small and medium-sized enterprises (MSMEs).
