RBI proposes ban on revolving credit by most NBFCs; only term loans to be allowed

The Reserve Bank of India (RBI) has proposed restricting most non-banking financial companies (NBFCs) from offering revolving credit facilities, a move that could significantly alter the range of lending products available through the sector. The proposal forms part of draft amendments to the Reserve Bank of India (Non-Banking Financial Company) Directions, 2025, which have been released for public comments.

Under the draft, NBFCs would be permitted to offer only term loan products and would no longer be allowed to provide revolving credit facilities. The restriction, however, would not apply to NBFCs that have been specifically authorised by the RBI to issue credit cards.

The proposal marks a significant regulatory shift by introducing formal definitions of "term loan" and "revolving credit" under the RBI Directions for the first time.

According to the draft, a term loan is a fund-based credit facility where a fixed principal amount is sanctioned and disbursed either in a lump sum or in instalments. The borrower repays the amount according to a predetermined repayment schedule. Importantly, once the principal has been repaid, the sanctioned credit limit cannot be restored or replenished.

In contrast, revolving credit has been defined broadly as any fund-based credit facility that does not satisfy the definition of a term loan. Such facilities typically allow borrowers to repeatedly draw down, repay and reuse the sanctioned credit limit without applying for a fresh loan each time.

To implement the proposed framework, the RBI has suggested deleting an existing provision under Chapter II of the 2025 Directions and removing the separate chapter dealing with Demand/Call Loans. In its place, the central bank has proposed a new section titled "Restrictions on Revolving Credit Facilities."

Jugal Mantri, ED & CEO Anand Rathi Global Finance, said: "The RBI’s proposal represents a significant regulatory shift for the NBFC sector, with the impact likely to be largely dampening for borrowers. The proposed changes could reduce the flexibility available to borrowers, particularly those who rely on credit lines backed by collateral for their short-term or working capital requirements. NBFCs may no longer be able to offer line-of-credit facilities against collateral. While this may bring greater regulatory consistency, it could also take away an important flexibility from borrowers. At the same time, it could place banks at an advantageous position, potentially creating an uneven playing field between banks and NBFCs."

The proposed provision clearly states that an NBFC "shall only offer credit products which are in the nature of term loans and shall not offer any revolving credit products." The only exception would be NBFCs that have received specific authorisation from the RBI to issue credit cards, allowing them to continue offering revolving credit through card-based products.

If the amendments are notified in their present form, they will come into force with immediate effect, according to the draft notification.

Mantri added: "The impact could also be significant for the rapidly growing fintech and digital lending ecosystem. Several fintech and digital lenders currently offer unsecured credit lines, often charging relatively high processing fees and other charges for setting up such facilities. The RBI’s proposed move could put pressure on these lenders and potentially affect business models built around flexible, easily accessible credit-line products. Personally, I believe the RBI should consider allowing NBFCs to continue offering line-of-credit and working capital facilities against tangible securities such as properties or listed securities, while restricting them from offering unsecured lines of credit. This would allow borrowers to retain flexibility while ensuring that lending remains adequately backed by tangible collateral, and could also help maintain a more level playing field between banks and NBFCs."

The RBI has invited public feedback before finalising the amendments. While the draft has been placed in the public domain for comments, the notification released by the central bank does not specify a deadline for stakeholders to submit their views.

The proposal is aimed at bringing greater clarity to the types of credit products that NBFCs can offer while creating a more uniform regulatory framework for non-bank lenders. If implemented, it could lead many NBFCs to redesign existing lending products to comply with the new term loan-only regime.