Many Indian lenders offer flexible credit lines. A borrower can take money, repay it, and take it again. The Reserve Bank of India (RBI) now wants to limit this for most non-banking financial companies (NBFCs). The Governor has also explained why.
This post covers what the RBI proposed, what the Governor said, who is affected, and what lenders can do. It is written in plain words. It is based on public reports as of October 2026. The rule was still a draft in the sources I checked. Please check the RBI website for the final version.
What Did the RBI Propose?
On August 6, 2026, the RBI shared a draft rule for public comment. It changes the NBFC Credit Facilities Directions from November 2025. The draft adds new meanings for “revolving credit” and “term loan”. It removes the part on demand and call loans. It adds a new part called “Restrictions on Revolving Credit Facilities.”
The main rule is simple. An NBFC may offer only term loans. It may not offer any revolving credit. The only exception is an NBFC that the RBI has allowed to issue credit cards.
Two key terms
The draft defines two terms that decide everything.
- Term loan: A loan of a fixed amount that meets certain listed features. One key feature, per experts, is that once you repay some or all of the principal, it cannot be restored for you to use again.
- Revolving credit: Any loan facility that is not a term loan.
The second meaning is very wide. If a product fails the term loan test, it counts as revolving credit. Before this draft, these two terms had no clear meaning for NBFCs.
So any product that lets a borrower draw, repay, and draw again within a set limit is now in question. The brand name does not matter. It could be called a flexi-loan, a credit line, or a top-up facility.
What Did the Governor Say?
After the draft came out, Governor Sanjay Malhotra spoke about it. He said the draft is not a new idea. He said it simply makes clear that NBFCs were never allowed to offer these loans.
He also gave a reason for the draft. New digital tools let lenders offer revolving products in the form of term loans. That is why the RBI chose to write the rules down.
What this means for lenders
The RBI sees this as a clear line, not a new ban. In its view, the rule already existed in spirit. Technology just made the line blurry.
Lenders may see it differently. Many built their products in good faith. Now they are being told these products may have been outside the rules all along. That is a hard message to hear.
Big questions remain. The clarification does not say what happens to loans already given. It does not say how much time lenders will get. It does not say which products will be allowed.
A calm note on the sector
The Governor also shared some good news. He said NBFC credit growth is strong. This covers both bank loans to NBFCs and NBFC loans to the real economy. Earlier reports also said there are no big worries about loan quality for now.
So this looks like a step to fix the structure. It does not look like a reaction to a crisis.
Why Does the RBI Care?
To judge the draft fairly, we should understand the RBI’s worries. Several have been reported.
It is hard to track defaults
The RBI is said to worry that it is hard to track credit behaviour and defaults in a revolving loan. A term loan has a fixed schedule. A missed payment is easy to see. In a revolving line, the balance goes up and down. A borrower in trouble can hide it by repaying and borrowing again.
Borrowers can fall into a debt trap
There is concern that borrowers may use new credit to pay old dues. This can create a cycle of debt. Easy access to more money can make a small problem bigger.
Hidden risk in the system
Some experts add another point. If a large share of NBFC lending acts like revolving credit but is not treated that way for risk and provisions, it could be a hidden risk to the system.
Fairness with banks
Banks cannot offer loosely controlled revolving credit outside the cash credit and overdraft rules. Those rules come with their own capital and provisioning needs. The RBI may want similar products to face similar rules.
Earlier hints
This did not come out of nowhere. In 2025, the RBI removed all mentions of revolving lines of credit from the NBFC directions. The same mentions still exist in the rules for banks. Many experts saw this as an early sign.
Why credit card issuers are exempt
The exception for card issuers has a clear logic. A standalone NBFC needs RBI approval and at least ₹100 crore in net owned funds to issue credit cards. In effect, the RBI says revolving credit is fine, but only for firms that are licensed, well funded, and closely watched.
How Has the Industry Responded?
The industry reacted fast. Big lenders such as Bajaj Finance, Tata Capital, and Shriram Finance wanted to meet RBI officials. They said the draft could hit products worth more than ₹2 lakh crore in assets.
The Finance Industry Development Council (FIDC) speaks for many NBFCs. It wrote to the RBI on August 27, 2026. It said a full ban would have side effects on many products. These include loans to small and medium businesses and loans against securities.
The main complaint: the definition
FIDC focused on the term loan meaning. It asked the RBI to look at it again. It said that rules against refilling a limit after repayment could raise interest and running costs for small businesses.
Ideas for a middle path
The industry offered some options:
- Let lenders restore principal that was paid early, with safeguards. This helps with prepayments, which are common in business loans.
- Give clear meaning to revolving credit. Add exemptions for MSME products like supply chain finance and invoice discounting.
- Allow revolving credit with stricter checks and clearer disclosures. Or make a new set of rules just for these loans.
Which Products Could Be Hit?
The answer depends on the final wording. Based on the draft and expert views, these are the main areas.
Flexi-loans and personal credit lines. Several large firms in consumer and personal finance offer revolving loans today. These are the clearest target.
Working capital for small firms. Some firms offer working capital as a revolving line. Most supply chain finance also works this way. If the draft stays as is, firms will need new ways to structure these loans.
Loans against securities. FIDC named these as being at risk. Many have draw-down features that look like revolving credit.
App-based credit lines. Digital lenders and fintech partners may feel the effect. The Governor himself pointed to technology as the reason lines became blurry.
Credit cards. Approved NBFC card issuers are exempt. Co-branded cards with banks are another path.
Advisers give lenders one clear tip. Finance and credit teams should check their whole product book against the draft’s term loan test now, and not wait for the final notice.
The Trade-Offs
No option here is perfect. Each choice helps one group and costs another.
Trade-off 1: Clear risk vs. flexible products
A term-only rule makes defaults easy to spot. It makes provisioning and checks simpler. But many borrowers like flexible loans. A small shop may have uneven cash flow. It may need to borrow, repay, and borrow again. With a fixed loan, it may take more than it needs. It may pay interest on idle cash. Or it may need to apply again and again.
Trade-off 2: Borrower safety vs. access to credit
The debt trap risk is real. But a ban has costs too. The proposed ban may reduce hidden risks. It could also cut credit access for borrowers who are poorly served today. Low-income families and small firms depend on NBFCs. If the legal products become harder to use, some may go to informal lenders. That could be worse for them.
Trade-off 3: One strict rule vs. a detailed rule
A blanket ban is easy to enforce. It is hard to dodge. But FIDC shows the downside. A wide meaning can catch safe products that are not like credit cards. A detailed rule could aim at real risk. It could use limits, better checks, and clear disclosure. But it is more complex. It needs more judgment from the regulator. It may also give firms more room to find loopholes.
Trade-off 4: Fair rules vs. new ideas
Banks follow strict rules for overdrafts. NBFCs should not get an easy path to the same product. Yet the RBI has said that NBFCs are often early users of new tech and business models. It said their experience could help shape rules for new areas. Strict rules may slow down the new ideas that helped bring more people into the system.
Trade-off 5: Fast action vs. smooth change
If the rule starts quickly, lenders may need to change live loans. They may need to rewrite contracts and rebuild systems. They must also explain changes to customers. More time makes this easier. But more time also means the RBI’s worry stays open for longer.
Challenges Under Each Path
If the draft passes as written. Sorting products will be the hardest task. Any doubt in the term loan test could push a product into the banned group. Lenders will need to study every contract. Old loans raise more questions. Must existing limits be frozen, changed, or run down?
If early repayment refills are allowed. This would meet a real need. But the line must be sharp. What counts as early repayment, and what counts as true revolving use? A weak line could turn the exception into a loophole.
If a new set of rules is made for credit lines. This may be the most balanced path. But it needs new standards. These could cover provisions for unused limits, caps on exposure, and better checks. It means more work for the RBI and higher costs for lenders.
If NBFCs move to card licences or bank tie-ups. Card licences are open to firms that meet the funding and approval needs. Small NBFCs may not qualify. A bank tie-up can keep the customer product alive. But it can change who controls it and who earns the profit. The RBI may also dislike deals that only change the label.
Why Impact on People Should Guide Decisions
Rules on NBFC credit lines touch real lives. So we should weigh the impact on people, not just the legal text.
Small businesses. Many need flexible working capital for stock and wages. Higher costs or harder access can slow growth. FIDC’s warning on higher costs should be tested with real data.
Individual borrowers. For some, a credit line is a handy tool. For others, it is a path to long-term debt. Good rules should tell these two groups apart. Tools like affordability checks, limits, and clear disclosure may work better than one blunt rule.
Lenders. The effect goes beyond lost income. There are also legal and operating risks. The RBI also talked about other topics. These included self-regulatory bodies, handling of customer complaints, and following digital lending rules and the Digital Personal Data Protection Act. So this draft is part of a larger push for tighter oversight.
The financial system. The RBI’s strongest point is that unseen risk is dangerous. Whether it ends in a ban or in a well-supervised permit, the system is safer when products are clear and measurable.
What Should Lenders Do Now?
The final rule is not known yet. But lenders can still prepare.
- List every product. Test each one against the draft terms. Look hard at any feature that lets a borrower reuse repaid money.
- Measure your exposure. Find out how much of your assets, income, and customers sit in at-risk products.
- Talk to the RBI. Share facts through industry bodies. Data on defaults, usage, and customer results counts for more than general complaints.
- Plan other options. Think about term loans with flexible payout, top-up loans, a card licence, or a bank tie-up. Each has its own costs and rules.
- Strengthen controls. The RBI has asked for strong internal controls, compliance, internal audit, and risk management, plus close watch on fast-growing products. Firms with good governance will be in a better place, whatever the outcome.
- Plan how to talk to customers. If products change, explain it early and in plain words.
Key Takeaways
- The RBI’s August 6, 2026 draft would limit most NBFCs to term loans. Card-issuing NBFCs are exempt.
- The Governor says this is a clarification and not a new ban.
- Revolving credit means anything that is not a term loan. So the term loan test is vital.
- The industry wants a narrower rule, exemptions for MSME products, and a way to refill prepaid principal.
- The main tension is risk visibility against product flexibility.
- Lenders should review products now and plan ahead.
Conclusion
This is not a simple fight between a tough regulator and a stubborn industry. Both sides have fair points. The RBI is right that loans which are hard to track can hide risk. It is also right that similar products should face similar rules. The industry is right that a wide definition can catch useful, low-risk loans. Small firms may pay the price.
The Governor’s words tell lenders where the RBI thinks the line has always been. What is still open is how sharply the final rule draws it, how much time lenders get, and whether a new set of rules for credit lines may replace a full ban.
Until then, lenders should know their risk, speak up with data, and build products that are clear and fair. Policymakers should ask one key question. Can the final rules make credit easier to see without shutting out the people who rely on flexible NBFC loans?
This post is for general information. It is not legal or financial advice. Please read the RBI’s official notices and speak to a qualified adviser before you act.
Not sure how the RBI’s revolving credit rules affect your loan products? Talk to NBFC Advisory today for a product-by-product review and a clear plan to stay ahead of the rules.
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