NBFC Ask RBI to Reconsider Proposed Restrictions on Revolving and Flexible-Repayment Credit Products

NBFCs Ask RBI to Reconsider Proposed Restrictions on Revolving and Flexible-Repayment Credit Products

Leading Indian non-banking financial companies are seeking discussions with the Reserve Bank of India over proposed restrictions on revolving-credit products, arguing that a blanket prohibition could disrupt established lending models used by businesses and individual borrowers.

The industry pushback follows draft amendments released by the RBI on August 6, 2026. Under the proposal, NBFCs would generally be permitted to provide only credit facilities structured as term loans and would not be allowed to offer revolving-credit products. NBFCs specifically authorised by the RBI to issue credit cards would be exempt from the proposed restriction.

Major lenders including Bajaj Finance, Tata Capital and Shriram Finance are among NBFCs seeking engagement with the central bank over the proposal.

The debate has significant implications for India's financial-services sector because revolving and flexible credit structures are used across MSME finance, working-capital lending, loans against property and some unsecured consumer and professional lending products.

RBI Proposes Major Change to NBFC Credit Rules

The RBI's draft represents a potentially significant change in how NBFCs can structure lending products.

Under the proposed framework, an NBFC would generally need to offer loans structured as term loans.

A term loan would involve a fixed principal amount made available to the borrower and repaid according to a predetermined amortisation schedule, either through periodic instalments or a bullet payment.

Importantly, once principal is repaid, the sanctioned amount would not automatically become available for borrowing again.

That distinction separates term lending from revolving credit.

What Is Revolving Credit?

Revolving credit gives borrowers access to an approved credit limit that can generally be drawn, repaid and used again subject to the terms of the facility.

Consider a business with a ₹10 lakh revolving limit.

It might initially use ₹4 lakh.

After repaying ₹2 lakh, that amount can potentially become available for borrowing again without requiring an entirely new loan.

This makes revolving credit particularly useful when funding requirements fluctuate.

Why Businesses Use Flexible Credit

Not every borrower needs the entire sanctioned amount on the first day of a loan.

Businesses frequently experience changing cash requirements.

An MSME may need additional money when:

purchasing inventory,

paying suppliers,

waiting for customer payments,

or managing seasonal demand.

A revolving facility allows the borrower to draw funds according to actual requirements rather than maintaining a fully disbursed loan throughout the period.

RBI Draft Would Restrict This Replenishment

The central regulatory issue is whether repaid principal can restore borrowing capacity.

Under the proposed term-loan framework, the sanctioned limit cannot be replenished once principal has been repaid.

That would require NBFCs to redesign products currently structured around reusable limits.

The change could be particularly significant for lenders that have developed flexible loan products as an alternative to conventional fixed-EMI borrowing.

NBFC Industry Seeks RBI Meeting

Major NBFCs are reportedly seeking a meeting with the RBI to explain their concerns before the regulator finalises the amendments.

The industry is expected to argue that revolving-credit structures serve legitimate borrower needs and should not necessarily be treated identically across every lending category.

The consultation process is important because the RBI has not yet finalised the proposal.

Stakeholders have until August 28, 2026 to submit feedback on the draft framework.

Bajaj Finance Has Significant Exposure to Flexible Lending

Bajaj Finance is one of India's largest diversified NBFCs and operates across numerous consumer and business lending categories.

Flexible lending has become an important part of the wider NBFC industry's product architecture.

For large lenders, a regulatory change affecting revolving facilities could therefore require substantial adjustments to:

product structures,

technology systems,

loan documentation,

customer communication,

and credit processes.

The issue is consequently much broader than simply changing repayment schedules.

Tata Capital Also Part of Industry Discussions

Tata Capital operates across retail, SME and corporate lending and is among the major financial institutions seeking engagement over the proposed rules.

Diversified NBFCs often serve customers whose requirements differ considerably from conventional consumer instalment loans.

A salaried individual purchasing an appliance has relatively predictable borrowing requirements.

A small business managing working capital may not.

That difference is central to the industry's argument for greater regulatory flexibility.

Shriram Finance Highlights Scale of NBFC Sector

Shriram Finance is another major NBFC associated with the industry's request for reconsideration.

India's NBFC sector plays a particularly important role in lending to customers and businesses that may not always fit conventional bank credit models.

NBFCs operate across:

vehicle finance,

MSME loans,

consumer lending,

housing-related finance,

gold loans,

equipment finance,

and other specialised credit categories.

Product flexibility has traditionally been one of the industry's competitive strengths.

MSME Borrowers Could Be Most Relevant to Debate

The potential effect on micro, small and medium enterprises has attracted particular attention.

MSME cash flows can be irregular.

A manufacturer may purchase raw materials today but receive payment from customers weeks later.

A retailer may need substantially more inventory before a festival.

A service company may need temporary funding while waiting for invoices to be settled.

Fixed Loans Do Not Always Match Variable Cash Flow

A conventional term loan provides certainty.

But it may not always provide flexibility.

If the borrower needs ₹5 lakh this month and only ₹1 lakh next month, maintaining a larger fixed loan can potentially increase interest costs.

Flexible credit allows funding to more closely follow actual business requirements.

Working-Capital Products Could Need Redesign

Working capital represents one of the clearest use cases for revolving finance.

Businesses continuously receive and spend money.

Their funding requirements therefore move throughout the operating cycle.

Revolving Facilities Match Business Cycles

A company can borrow when inventory increases.

It can repay when customers settle invoices.

It can borrow again when another purchasing cycle begins.

Removing the ability to replenish the limit changes this relationship.

NBFCs may need to replace such products with term or bullet-repayment structures if the draft rules are implemented substantially as proposed.

Loans Against Property Could Also Be Affected

Some NBFCs provide flexible facilities secured against property.

These products can allow business owners or professionals to access funds against collateral while paying interest according to utilisation.

Analysts have identified loan-against-property products among categories potentially affected by the proposed framework.

For lenders, secured revolving facilities can serve customers who need ongoing liquidity rather than one-time financing.

Personal Flexi Loans Face Questions

The implications are not restricted to business borrowers.

Some NBFCs offer personal loans with flexible withdrawal and repayment features.

A customer may receive an approved limit but use only part of it.

That can provide flexibility for:

medical expenses,

home improvements,

education,

or other unpredictable costs.

If the final RBI framework restricts such structures, lenders may shift customers toward conventional term loans.

Credit Cards Receive Important Exemption

The RBI proposal does not completely eliminate revolving credit from the NBFC sector.

NBFCs specifically authorised to issue credit cards would remain exempt for their authorised credit-card operations.

That distinction is important.

Credit cards are fundamentally revolving-credit products.

Customers receive a limit, spend against it, repay balances and regain available credit.

The RBI's draft therefore appears focused on revolving structures offered outside the specifically regulated credit-card framework.

Only Authorised NBFC Card Issuers Receive Exemption

The exemption does not mean every NBFC can simply redesign a flexi loan as a credit card.

Credit-card issuance requires RBI authorisation and operates under a separate regulatory framework.

Consequently, most NBFCs would still need to comply with the proposed restriction if it becomes final.

This could create a clearer regulatory distinction between authorised revolving card credit and other NBFC lending products.

Why RBI May Prefer Term-Loan Structures

Term loans provide a clearly defined credit exposure.

The borrower receives a fixed principal amount.

The repayment schedule is predetermined.

The outstanding balance gradually declines according to the agreed structure.

Revolving Products Can Be More Dynamic

A revolving facility behaves differently.

Borrowers can repeatedly draw and repay funds.

The lender's exposure therefore changes continuously.

From a regulatory perspective, this can make product classification and borrower indebtedness more complicated.

Clearer loan structures can potentially improve transparency and credit monitoring.

Borrower Indebtedness Is Important Regulatory Concern

India has experienced rapid growth in retail and unsecured credit over recent years.

The RBI has repeatedly emphasised prudent underwriting and responsible lending.

Revolving products can potentially make it easier for borrowers to maintain credit exposure over extended periods.

This does not automatically make them problematic.

But regulators may want stronger visibility over how such facilities are sanctioned and used.

NBFCs Argue Blanket Restriction May Be Too Broad

The industry's likely concern is that revolving credit covers very different types of lending.

A consumer using unsecured credit is not necessarily comparable to an established MSME using a secured working-capital line.

Treating both identically could reduce useful product flexibility.

NBFCs are therefore seeking regulatory engagement before the framework is finalised.

The consultation provides an opportunity to propose alternatives such as differentiated rules according to borrower type, security or product purpose.

Morgan Stanley Flags Impact on Multiple Segments

Analysis following the RBI draft indicated that flexi and overdraft-style products could be affected across corporate, MSME and unsecured personal lending.

This illustrates the breadth of the proposal.

The issue is not confined to one niche credit category.

It could affect several product families developed by large NBFCs.

Lenders Could Move Toward Bullet Loans

One potential industry response is greater use of bullet-repayment structures.

A bullet loan remains a term loan when structured within the regulatory definition, but most or all principal can be repaid at the end of the agreed period.

Bullet Structures Preserve Some Flexibility

Borrowers can retain funding for the required period without making large principal repayments every month.

However, the structure is still fundamentally different from revolving credit.

Once principal is repaid, the borrower cannot simply redraw the amount under the same replenishing limit.

A new credit decision may be required.

Borrower Costs Could Increase

Flexible credit can allow borrowers to pay interest only on funds actually utilised, depending on product terms.

Replacing such facilities with conventional loans could potentially increase financing costs for some customers.

Borrowers May Need Larger Sanctioned Loans

Suppose an MSME expects its funding requirement to fluctuate between ₹5 lakh and ₹15 lakh.

A revolving structure can accommodate that variation.

Without it, the company might need to take a larger term loan to ensure sufficient liquidity during peak periods.

That could result in paying interest on funds that are not continuously required.

Operational Costs Could Also Rise

Revolving facilities allow repeated use under one approved structure.

If lenders need to issue new term loans more frequently, additional processes may be required.

These can involve:

credit checks,

documentation,

loan agreements,

disbursement,

and account management.

Digital systems can automate much of this work, but repeated loan creation still carries operational costs.

Fintech Partnerships Could Be Affected

Many digital-lending businesses operate through partnerships with regulated NBFCs.

Their customer experiences are often designed around instant or flexible credit.

Product Architecture May Need Changes

A fintech application might currently show a customer an available credit limit.

The user can draw money as needed.

Repayments restore availability.

That interface is effectively built around revolving credit.

If the underlying NBFC can no longer provide that structure, the fintech may need to redesign the product as a sequence of individual term loans.

This could change both customer experience and economics.

Embedded Credit Models Could Face Similar Questions

Credit is increasingly integrated directly into digital commerce and business platforms.

An MSME using a procurement platform might receive a flexible financing limit linked to purchases.

Such models work well when borrowing can adjust continuously.

Restrictions on revolving credit could require lenders and technology platforms to rethink how these products are structured.

Banks Could Gain Competitive Advantage

Banks traditionally provide working-capital facilities including cash-credit and overdraft structures.

If NBFCs face tighter restrictions on comparable revolving products, banks could gain a relative competitive advantage in some lending segments.

Regulatory Perimeter Matters

Banks and NBFCs perform overlapping financial functions but operate under different regulatory frameworks.

The RBI may consider those differences justified by their respective structures and prudential requirements.

From the customer's perspective, however, lenders compete directly for the same financing requirement.

Product restrictions can therefore influence market share.

MSMEs Could Shift Toward Bank Credit

Established businesses with strong banking relationships may respond by moving revolving requirements toward banks.

But not every MSME has equal access to bank working-capital facilities.

NBFCs often serve customers requiring faster underwriting or more specialised credit assessment.

If product options narrow, some borrowers could face reduced financing flexibility.

This is one reason the industry's response will be closely watched.

Credit Assessment Could Become More Frequent

Revolving facilities allow a lender to establish an approved limit and monitor the relationship over time.

A term-loan-only model can require more frequent individual credit decisions when customers need additional borrowing.

This could potentially improve underwriting discipline.

It could also increase friction.

The regulatory trade-off is therefore between flexibility and control.

RBI Consultation Is Critical

The draft has not yet become final regulation.

Stakeholders can submit feedback until August 28.

That means the current industry lobbying represents part of the formal policy-development process rather than opposition to an already implemented prohibition.

The RBI could retain the proposal, modify it, introduce additional exemptions or provide transitional arrangements after considering feedback.

Transition Period Could Become Important

If the RBI proceeds with the restriction, lenders will need clarity about existing revolving facilities.

Questions could include:

whether existing loans can continue until maturity,

whether limits can be renewed,

how undrawn commitments are treated,

and how quickly new products must comply.

The final implementation framework could therefore be almost as important as the underlying restriction.

Existing Customers Need Certainty

Abruptly changing a credit facility can disrupt borrower planning.

An MSME may have structured its working-capital cycle around an existing flexible limit.

A retail borrower may similarly expect access to unused credit.

Clear transitional provisions would allow customers and lenders to adjust without unnecessary disruption.

Asset Quality Could Influence RBI’s Final Approach

Any regulatory decision needs to consider credit risk.

If particular revolving products demonstrate materially weaker repayment behaviour, stronger restrictions may be justified.

If well-underwritten secured facilities perform strongly, industry participants could argue for differentiated treatment.

Data on defaults, utilisation and borrower leverage may therefore become important during consultation.

Consumer Protection Remains Central

Flexible products can be useful, but customers need to understand their structure.

Important disclosures include:

interest rates,

fees,

available limits,

repayment requirements,

and consequences of repeated borrowing.

A customer should not mistake an automatically replenishing credit line for unlimited financing.

Clear disclosure is particularly important in digital lending, where borrowing can occur within seconds.

Responsible Lending Could Provide Middle Ground

The policy debate does not necessarily have to be framed as unrestricted revolving credit versus a complete prohibition.

Alternative approaches could include:

stricter underwriting,

lower limits,

enhanced disclosures,

additional reporting,

or restrictions on specific borrower categories.

Whether the RBI considers such alternatives will become clearer after the consultation period.

Credit Bureaus Could Play Larger Role

India's credit-information infrastructure gives lenders significant visibility into borrower obligations.

Improved reporting of revolving limits and utilisation could potentially strengthen risk monitoring.

Sanctioned Limit and Actual Usage Are Different

A borrower with a ₹10 lakh revolving facility may use only ₹2 lakh.

Credit assessment therefore needs to understand both available and outstanding exposure.

Accurate reporting can help other lenders determine the borrower's total potential indebtedness.

Digital Lending Has Increased Product Innovation

NBFCs and fintech companies have introduced increasingly flexible borrowing experiences.

Consumers can obtain small loans quickly.

Businesses can access working capital through digital platforms.

Technology has reduced the operational cost of originating credit.

But faster innovation also creates regulatory challenges.

Rules need to keep pace with products that do not fit neatly into traditional categories.

RBI Is Clarifying Regulatory Boundaries

The draft can be viewed as part of a broader effort to define which types of credit products different regulated entities should provide.

Authorised credit-card issuers operate under one framework.

Banks operate under another.

NBFCs have their own prudential requirements.

Clear boundaries can reduce regulatory arbitrage, where economically similar products are structured differently primarily to obtain lighter regulatory treatment.

NBFCs Remain Critical to Indian Credit Growth

Whatever the final outcome, NBFCs will continue playing a major role in India's financial system.

They provide credit to:

households,

small businesses,

commercial vehicle operators,

property owners,

professionals,

and large companies.

Their specialised underwriting allows them to serve borrower segments that may require different approaches from traditional banking.

Regulation therefore needs to manage systemic and consumer risks without unnecessarily weakening useful credit channels.

Investors Are Watching Business-Model Exposure

The RBI proposal also has implications for investors in listed NBFCs.

Companies with larger portfolios of flexi, overdraft or revolving products may face greater adjustments than lenders primarily offering conventional term loans.

Investors will want to understand:

portfolio exposure,

replacement products,

customer retention,

yield impact,

and operational costs.

Management commentary following the final rules could therefore become important for valuations.

Product Redesign Could Protect Part of Economics

NBFCs have substantial experience adapting to regulatory change.

If revolving structures are restricted, lenders are likely to develop alternative products that remain within the new framework.

These could involve shorter-duration term loans, bullet structures or repeated digital disbursements.

The key question is whether these alternatives can provide customers with comparable flexibility without materially increasing costs.

Competition Could Drive Innovation

Regulatory restrictions often change rather than eliminate financial innovation.

Lenders may build new underwriting systems capable of approving incremental term loans rapidly.

Technology could make individual loans feel almost as convenient as a revolving facility from the customer's perspective.

However, the underlying legal and credit structure would remain different.

August 28 Becomes Key Date

The immediate focus is the RBI's consultation deadline.

NBFCs and other stakeholders have until August 28, 2026 to provide comments on the proposed amendments.

Industry discussions before that deadline could influence the final framework.

The regulator will need to balance several objectives:

financial stability,

consumer protection,

credit transparency,

competition,

and access to flexible financing.

Conclusion

Indian NBFCs are seeking a reconsideration of the RBI's proposed restriction on revolving-credit products as the industry warns that a blanket prohibition could affect established financing models across MSME, working-capital, loan-against-property and personal lending.

The August 6 draft would generally restrict NBFCs to term loans whose principal cannot be replenished after repayment, while preserving an exemption for NBFCs specifically authorised to issue credit cards.

For lenders including Bajaj Finance, Tata Capital and Shriram Finance, the proposal could require significant product redesign if adopted substantially in its current form.

For borrowers, the central issue is flexibility. Revolving facilities allow businesses and consumers to draw, repay and reuse credit according to changing requirements. Replacing them with fixed term loans could increase financing friction or costs in some circumstances.

The proposal remains under consultation, with comments due by August 28.

The final outcome will therefore depend on whether the RBI concludes that revolving credit outside the authorised credit-card framework creates risks requiring a broad restriction, or whether industry arguments support a more differentiated regulatory approach.