What is the RBI's Proposed Rule?
The RBI has issued a draft circular that aims to clearly define what kind of loans NBFCs can offer. The proposal states that NBFCs should primarily offer 'term loans'. A term loan is what most of us think of as a standard loan: a fixed amount of money
is sanctioned and given to the borrower, who then repays it over a fixed period according to a pre-set schedule. The crucial part of the proposal is that once any part of the principal is repaid, the borrower's credit limit is not automatically restored. Essentially, you can't re-borrow the amount you've already paid back within the same loan agreement. This move seeks to standardize lending products and bring more clarity.
Understanding Revolving Credit
Revolving credit works very differently. The most common example is a credit card. A lender gives you a credit limit—say, ₹1 lakh. You can spend any amount up to this limit, pay it back in full or in part (by making a minimum payment), and then the credit becomes available to use again. As you repay, your available credit replenishes. The RBI's draft defines any credit facility that doesn't fit the strict definition of a term loan as revolving credit. This kind of credit line is open-ended and highly flexible, which is why products like 'flexi loans' or overdraft facilities from NBFCs have become popular, especially with self-employed individuals and small businesses.
The Key Difference: A Fixed Path vs. A Circular Drive
The core distinction lies in the structure and reusability of the funds. A term loan, under the RBI's proposal, is a one-way street. A fixed amount is borrowed and is repaid over time; the loan concludes once the final payment is made. Revolving credit, on the other hand, is like a roundabout. You can draw funds, repay them, and draw them again continuously, as long as you stay within your overall limit. The proposed RBI rule essentially prohibits NBFCs from offering this circular, reusable credit facility unless they are specifically authorised to issue credit cards. Many 'flexi loans' currently function like revolving credit, and these are the products the RBI is targeting.
Why is the RBI Making This Distinction?
The regulator's primary concern appears to be risk and transparency. With revolving credit-style products, it can be difficult to assess whether a borrower is repaying their debt from their income or by simply drawing down more credit to cover existing dues. This practice, known as 'evergreening', can mask financial stress and lead borrowers into a debt trap. By pushing NBFCs towards a clear term-loan structure, the RBI aims to get a more accurate picture of a borrower's financial health and ensure that repayments reflect genuine capacity to pay, not just fresh borrowing. This standardizes the rules, bringing most NBFC products under a more controlled framework, similar to traditional loans.
What This Means for Borrowers and Lenders
For borrowers, the change could mean less ambiguity but also potentially less flexibility. The convenience of drawing and repaying funds as needed through a single 'flexi loan' account may disappear. Instead, a new loan might be required for new funding needs. For NBFCs, especially those with a significant portfolio of flexi or overdraft-style loans, this proposal means they will have to redesign their products to be compliant. While this could impact loan growth and fee income in the short term, many analysts believe the industry will adapt by creating new, compliant products. The move is part of a broader RBI effort to strengthen regulation, increase transparency, and protect consumers in the rapidly growing digital lending space.
