Understanding Revolving Credit
Revolving credit is a financial product many Indians are familiar with, most commonly through credit cards. It provides a credit limit that you can draw from, repay, and draw from again. For example, if you have a credit card with a ₹1 lakh limit and spend
₹20,000, you have ₹80,000 remaining. Once you repay the ₹20,000, your full ₹1 lakh limit is restored and becomes available to use again. This cycle of borrowing, repaying, and reusing is what makes the credit 'revolve'. It offers significant flexibility, as you only use what you need and interest is typically charged on the outstanding balance. Many NBFCs and fintech lenders have offered similar products, often called 'flexi loans' or digital lines of credit, which provide this continuous access to funds for consumers and small businesses.
The RBI's Proposed Rule: A Shift to Term Loans
The Reserve Bank of India has released draft regulations that would significantly change this landscape for NBFCs. The proposal mandates that NBFCs, unless they are specifically authorised to issue credit cards, should primarily offer term loans. A term loan is defined as a loan where a fixed amount is sanctioned and disbursed, and it must be repaid according to a pre-determined schedule. Crucially, the proposed rule states that once a part of the principal is repaid, that amount cannot be made available again for the borrower to draw from. In simple terms, if you have a ₹5 lakh loan and repay ₹1 lakh, your loan amount simply reduces; the ₹1 lakh does not get added back to a reusable credit limit. This effectively prohibits NBFCs from offering the revolving credit facilities that have become popular.
The Core Difference: Flexibility vs. Structure
The fundamental difference between the two models is reusability and predictability. Revolving credit offers flexibility. Borrowers can access funds as needed, making it ideal for managing fluctuating cash flow or unexpected expenses without needing a new loan application each time. The proposed term loan structure for NBFCs introduces rigidity, but also predictability. A term loan has a clear end date and a fixed repayment schedule, which can help with budgeting for both the borrower and the lender. Under the RBI's proposal, if a borrower needs more funds after repaying a portion of their loan, they would likely need to apply for a fresh loan, making the process less convenient. This is a shift from the 'draw-repay-redraw' convenience that defined many NBFC flexi-loan products.
What This Means for Borrowers
For consumers, this proposed change is a double-edged sword. On one hand, it could reduce the flexibility they currently enjoy with certain NBFC products. Short-term or emergency funding might become less accessible, as getting a new term loan involves more friction than drawing from an existing credit line. On the other hand, the move towards structured term loans could bring greater clarity and discipline. With fixed EMIs and a clear loan-end date, borrowers may be less likely to fall into the debt cycles that can sometimes be associated with revolving credit, where paying only the minimum amount due can lead to accumulating interest. The structure of a term loan makes the total cost and repayment timeline explicit from the start.
Impact on the NBFC and FinTech Landscape
The proposal will have a significant impact on the business models of many NBFCs and their fintech partners. Products like flexi personal loans, digital lines of credit, and some working capital loans structured as overdraft facilities will need to be redesigned. Lenders may see a slowdown in loan book growth, as the 'customer stickiness' that comes from an existing, reusable credit line will be diminished. The RBI's intention appears to be to create a more consistent regulatory framework, ensuring that lending products are transparent and do not carry hidden risks. While it may level the playing field between banks and NBFCs, it will force many non-bank lenders to innovate within a more structured and less flexible lending environment.
