The RBI's New Blueprint for NBFC Lending
The Reserve Bank of India has released draft amendments proposing a significant change for NBFCs: a primary focus on providing term loans while restricting revolving credit facilities. A term loan is defined as credit for a fixed amount with a predetermined
repayment schedule. Crucially, under this proposed structure, once a part of the principal is repaid, the credit limit is not automatically replenished for the borrower to use again. This is a direct move away from more flexible, overdraft-style 'flexi loans' that have become popular. The only exception to this rule would be for NBFCs specifically authorised by the RBI to issue credit cards, where revolving credit is a fundamental feature.
What Sparked This Regulatory Shift?
This proposal aims to create clearer distinctions between different loan structures and enhance regulatory oversight over the NBFC sector. The central bank appears concerned about the ambiguity of some hybrid loan products that function like a credit line but are not regulated as such. By defining anything that isn't a classic term loan as 'revolving credit' and then restricting it, the RBI is pushing for more standardisation. Some experts believe the regulator's worry may be that topped-up loans could be used for 'evergreening' — the practice of taking a new loan just to repay an existing installment, which can mask underlying financial stress. The draft rules are currently open for public and stakeholder feedback until August 28, 2026.
The Borrower's Gain and Loss
For borrowers, the changes present a mixed bag. On one hand, the move complements other recent RBI directives aimed at protecting consumers, such as the removal of foreclosure charges and prepayment penalties on floating-rate loans for individuals and MSMEs, which became effective January 1, 2026. This gives borrowers more freedom to switch to lenders with better terms. However, the loss of revolving credit facilities could be a significant blow to convenience. Many customers, from individuals to small businesses, rely on flexi loans to manage cash flow, drawing funds as needed without having to apply for a new loan each time. Shifting everyone to a rigid term-loan structure could make borrowing less convenient and potentially more costly if they have to borrow funds in advance.
The NBFC's Core Dilemma
For NBFCs, the proposed rules pose a direct challenge to a profitable and popular product segment. 'Flexi loans' improve customer stickiness, as a client with an existing credit line is more likely to return. They also support faster growth in Assets Under Management (AUM) because as customers redraw funds, the loan book depletes more slowly. Some major players like Bajaj Finance have a significant portion of their loan book, estimated at around 15%, in such revolving products. The key money question for these companies is how to adapt. They will need to redesign loan products to be compliant while trying to retain the features that made them attractive to customers in the first place. This involves balancing regulatory compliance with maintaining their business models and profitability.
The Big Picture: Part-Repayment and Market Impact
The heart of the issue is the treatment of part-repayments. In a revolving credit model, a part-repayment frees up the credit limit for reuse. In the proposed term loan model, a part-repayment simply reduces the outstanding principal. While this provides a clearer amortisation schedule for the lender, it removes the utility of a standing credit line for the borrower. The broader market impact could be significant. The move could level the playing field between banks, which primarily offer term loans, and NBFCs. However, it might also stifle the product innovation that has allowed NBFCs to serve customers in ways that traditional banks often do not. The industry is expected to make representations to the RBI, arguing that flexi products offer valuable flexibility to borrowers.
