The Core Proposal: Term Loans Only
The Reserve Bank of India (RBI) has released draft amendments that could fundamentally reshape lending by Non-Banking Financial Companies (NBFCs). The central proposal is to restrict NBFCs to offering credit only in the form of 'term loans'. A term loan is defined
as having a fixed principal amount, disbursed in one or more parts, that must be repaid according to a pre-determined schedule. Crucially, once a part of the principal is repaid, the sanctioned limit cannot be topped up or made available again to the borrower under the same loan agreement. Any credit facility that doesn't meet this strict definition would be considered 'revolving credit', which NBFCs would be prohibited from offering. The only exception would be for NBFCs specifically authorised by the RBI to issue credit cards, as revolving credit is an intrinsic feature of that product.
Targeting 'Evergreening' Risks
The RBI's primary motivation appears to be curbing the practice of 'evergreening' loans. This is a practice where a lender provides new loans to a borrower who is struggling to repay an existing debt. This allows the old loan to be settled, masking the underlying financial stress of the borrower and preventing the loan from being classified as a Non-Performing Asset (NPA). Flexible, revolving credit products can inadvertently facilitate this by allowing a stressed borrower to draw down fresh funds to service their existing obligations. By pushing all lending into a rigid term-loan structure with a clear amortisation schedule, the RBI aims to make it harder to hide bad loans and ensure that repayments reflect genuine cash flow from the borrower, not just recycled credit from the same lender.
Impact on NBFCs and Their 'Flexi' Products
The draft rules are expected to have a significant impact on NBFCs that have built business models around flexible loan products. Many lenders, such as Bajaj Finance, offer 'flexi-loans' or overdraft-style facilities where customers can borrow, repay, and re-draw funds multiple times against a sanctioned limit. These products, popular in consumer, MSME, and corporate lending, offer convenience to borrowers and create a steady stream of repeat business for lenders. According to one estimate, such revolving facilities could account for around 15% of Bajaj Finance's assets under management. If the rules are finalised as proposed, NBFCs would need to redesign these products to comply, potentially affecting loan growth, customer acquisition, and fee income. The rules are open for public comment until August 28, 2026.
What Does This Mean for Borrowers?
For customers, the proposed changes could mean less flexibility. Borrowers who rely on NBFC credit lines for working capital or emergency liquidity may find their options limited. Instead of the convenience of drawing down from a pre-approved limit, they might need to apply for a new term loan each time they need additional funds. This could add friction to the borrowing process and potentially increase costs for consumers and small businesses. Proponents argue that while less convenient, the new structure enforces better financial discipline. However, some analysts note that commercial banks are not subject to the same proposed restrictions and can continue offering overdraft facilities. This could create a competitive disadvantage for NBFCs and push some borrowers towards the banking system.
