RBI’s revolving-credit draft could reshape ₹2 lakh crore of NBFC lending: what is actually proposed — and what is not banned yet

Executive takeaway

RBI’s August 6 draft on NBFC credit facilities could force one of the largest product-design changes in India’s non-bank lending market in years.

The proposed text would insert a new rule under which an NBFC may offer **only credit products in the nature of term loans and shall not offer revolving credit products**, with an explicit exception for an NBFC authorised by RBI to issue credit cards. It would also define a term loan around a fixed principal amount, a predetermined repayment schedule and—crucially—a sanctioned limit that **cannot be restored or replenished after principal is repaid**.

That last feature is the economic dividing line.

A revolving facility behaves like a reusable line: the borrower draws, repays and can draw again within the sanctioned limit. A term loan is a discrete exposure that amortises or is repaid on stated dates; repayment does not recreate the borrowing limit.

Industry representatives cited by Economic Times estimate that established products potentially affected by the proposal carry **more than ₹2 lakh crore of aggregate AUM**. They also argue that much of the market serves MSMEs and individuals. Those numbers are industry claims, not RBI statistics, and Finin2min does not treat them as official estimates.

The most important status point is simpler: **there is no operative blanket ban today merely because the draft exists.** RBI has invited comments through August 28, 2026. The final rule could retain, modify, phase, grandfather or otherwise calibrate the proposal.

What RBI’s draft actually says

The draft is titled *Reserve Bank of India (Non-Banking Financial Companies – Credit Facilities) Amendment Directions, 2026*. RBI released it for public comments on August 6 under Press Release 2026-2027/825.

The reproduced draft text makes four structural changes to the 2025 NBFC Credit Facilities Directions:

• it proposes definitions of **revolving credit** and **term loan**;
• it deletes an existing sub-paragraph in the general directions;
• it removes the separate Part D dealing with demand/call loans in Chapter VIII; and
• it inserts a new Part F titled **Restrictions on revolving credit facilities**.

The proposed paragraph 108A is unusually direct: NBFCs would offer only term-loan products and would not offer revolving-credit products. The stated exception is for an NBFC authorised by RBI to issue credit cards.

The draft further says the amendments would come into force immediately. That sentence must be read in the right legal sequence. It describes the proposed commencement of the **final amendment directions if issued in that form**; it does not convert the consultation draft itself into a current prohibition.

Why the definition matters more than the product name

An NBFC cannot solve a rule like this simply by changing “Flexi Loan” to “Term Loan” in the app.

RBI’s proposed definition looks to the economic mechanics. A term loan has a fixed principal amount, disbursement in one or more instalments, a predetermined amortisation or bullet-repayment schedule and a non-replenishing sanctioned limit.

That means the compliance question is not what the product is called. It is whether repayment restores usable borrowing capacity.

Consider a ₹10 lakh sanctioned line. A borrower draws ₹4 lakh and later repays ₹2 lakh. If the facility again makes that ₹2 lakh available to draw without a fresh credit sanction, the economics are revolving. If the outstanding balance merely falls and the repaid portion cannot be reborrowed, it looks much closer to a term-loan structure.

This mechanical test is important for product teams because many digital credit lines, flexi-business loans, some working-capital products and certain loan-against-property variants are designed around redraw convenience rather than one-time disbursement.

Why RBI may be uncomfortable with revolving structures

The draft itself is concise and should not be expanded into motives RBI has not formally stated. But the supervisory debate reported around it highlights three risk channels that deserve analysis.

The first is **evergreening visibility**. A stressed borrower with an undrawn portion of a revolving limit can potentially use new drawings to service earlier dues. A clean payment record can therefore become less informative if the lender does not distinguish repayment from genuine operating cash flow versus repayment funded by further borrowing.

The second is **credit re-underwriting**. A reusable line may remain available after the borrower’s financial position has deteriorated unless the lender has strong refresh triggers, cash-flow monitoring and limit controls. Term-loan disbursements make the moment of new exposure more explicit.

The third is **liquidity forecasting for the lender**. A borrower’s right to draw and redraw can make funding needs less predictable than a fixed-disbursement structure. This is not automatically unsafe—banks have managed working-capital lines for decades—but non-bank funding models and supervisory information can differ.

Finshots has also highlighted the regulatory-architecture question: credit cards already sit inside a specific RBI authorisation framework. A credit line that behaves very similarly to a card without the card could create product-boundary questions.

These are plausible supervisory concerns. They should not be quoted as RBI’s official rationale unless the final directions or an RBI explanatory statement says so.

The industry’s counterargument is economically serious

The other side of the debate is not merely “NBFCs want to preserve revenue”.

Revolving credit solves a genuine cash-flow problem for borrowers whose funding need repeatedly rises and falls. An MSME buys inventory, waits for receivables, repays when cash arrives and then needs financing again for the next cycle. A reusable facility can match that operating rhythm better than repeated one-off term loans.

Economic Times reported that large NBFCs, including Bajaj Finance, Tata Capital and Shriram Finance, were preparing to seek reconsideration through the Finance Industry Development Council. Industry representatives said products potentially affected have more than ₹2 lakh crore of AUM, the market is growing 15–20% annually and nearly 90% serves MSMEs and individuals.

Again, those are industry estimates. They are useful for sizing the dispute, but they should not be presented as audited system-wide RBI data.

The industry also raises a **competitive-neutrality** issue. Banks can offer overdrafts, cash-credit facilities and other revolving working-capital structures. A blanket product prohibition only for NBFCs could shift business to banks rather than eliminate the underlying borrower need.

That does not make the rule wrong. It does mean RBI must weigh supervisory visibility against the possibility of regulatory arbitrage and reduced access for borrowers that rely more heavily on non-bank finance.

₹2 lakh crore does not mean ₹2 lakh crore disappears overnight

This is one of the most important corrections to sensational headlines.

The reported ₹2 lakh crore figure is an industry estimate for the aggregate AUM of established products that may be affected. It is **not** an estimate that ₹2 lakh crore of loans will be cancelled on day one, written off or immediately refinanced.

The final impact depends on transition design.

RBI could distinguish between new sanctions and existing facilities. It could allow grandfathering until maturity. It could prescribe a migration period. It could create exceptions for tightly controlled working-capital products or require periodic fresh underwriting. Or it could largely retain the draft as written.

Until the final directions address transition, any estimate of immediate balance-sheet run-off is speculative.

What could change for NBFC economics

If the proposal is finalised in a strict form, the first-order impact is product redesign. The second-order impact is more interesting.

Reusable lines can improve customer retention because a borrower who has already passed underwriting can access incremental liquidity without starting from zero. They can reduce acquisition friction and create repeat usage. They may also support cross-selling and deepen the lender’s customer relationship.

Replacing that architecture with repeated term loans can increase:

• underwriting events;
• documentation and Key Facts Statement generation;
• bureau checks and cash-flow refreshes;
• system calls and disbursement processing;
• customer drop-off;
• operating cost per incremental borrowing event.

Some of those costs may be worth paying if they materially improve credit discipline. But they should be measured against the credit-loss benefit rather than assumed to be free.

What borrowers should and should not do now

Borrowers should **not** assume an existing flexi or revolving loan is suddenly illegal or unavailable because of a news headline.

Check the contractual facility, lender communication and final RBI rule when issued. Do not prepay, refinance or draw unnecessarily based only on the consultation.

MSMEs that depend on repeated short-cycle funding should, however, map their alternatives now: bank cash credit, overdraft, invoice finance, supply-chain finance, conventional working-capital term loans and internal liquidity buffers. The goal is not to panic; it is to understand the refinancing path if product structures change.

What NBFC compliance and product teams should do before August 28

The consultation deadline makes this an immediate implementation-preparation story, not only an investor story.

A serious response should begin with an inventory of every product in which repayment restores sanctioned availability. For each product, teams should document:

1. contractual draw/redraw mechanics;
2. customer segment and use case;
3. outstanding AUM and undrawn commitments;
4. delinquency and credit-cost behaviour;
5. evidence of fresh underwriting or monitoring before redraw;
6. bureau and bank-statement visibility;
7. transition options if redraw is disabled;
8. IT, accounting, KFS and disclosure changes;
9. funding/liquidity implications; and
10. customer-impact evidence, especially for MSMEs.

That evidence is more useful to a regulator than a generic argument that “the market is large”.

A possible middle ground

The policy choice does not have to be “unrestricted revolving credit” versus “no revolving credit”.

A calibrated framework could theoretically require periodic renewal, fresh income/cash-flow checks before material redraws, hard utilisation triggers, explicit restrictions on using fresh drawings to service the same facility, stronger bureau reporting, maturity limits or product-level liquidity controls.

Whether RBI wants such a middle ground is for the regulator to decide. The key analytical point is that **product architecture can target the supervisory risk more precisely than a label alone**.

Why investors should care

For listed and soon-to-be-listed NBFCs, the market impact will depend on three numbers that company disclosures—not social media—need to establish:

• the proportion of AUM truly meeting RBI’s proposed revolving definition;
• the revenue and margin contribution of those products; and
• the percentage that can migrate to compliant term-loan or other permitted structures without losing the customer.

A share-price reaction cannot substitute for this mapping. Company-specific exposure should be taken from exchange filings, earnings calls or official lender disclosures before being converted into a valuation conclusion.

Finin2min bottom line

RBI’s draft is potentially large because it attacks the **replenishing-limit feature** at the centre of many flexi-credit models—not because the words “revolving credit” sound technical.

The regulator’s challenge is legitimate: a reusable line can weaken visibility into whether a borrower is genuinely repaying from cash generation or merely cycling debt. The industry’s challenge is legitimate too: working-capital borrowers often need repeated liquidity, and forcing a fresh term loan for every cycle can add friction and cost.

The best final rule will therefore be judged by whether it closes opaque evergreening and underwriting gaps **without unnecessarily choking productive short-duration credit**.

For now, the legally precise headline is: **RBI has proposed the restriction, comments close August 28, and most NBFC revolving credit is not yet banned by the draft itself.**