The Reserve Bank of India has proposed draft amendments to the Reserve Bank of India (Non-Banking Financial Companies – Credit Facilities) Directions, 2025, that would prohibit most NBFCs from offering revolving credit facilities, allowing them to extend only term loans. This move, if implemented, could significantly reshape lending products such as flexi loans, credit lines, and other reusable credit facilities offered by several retail-focused NBFCs and fintech partnerships.
The draft introduces formal definitions for "term loan" and "revolving credit" for the first time under these directions. A term loan has been defined as a fund-based credit facility with a fixed principal amount, where the sanctioned limit is disbursed in one or more instalments and repaid according to a predetermined repayment schedule. Crucially, once the principal is repaid, the sanctioned limit cannot be restored or replenished. In contrast, revolving credit has been defined as any fund-based credit facility that does not meet this definition.
While the draft notification itself does not explicitly detail the rationale, the proposal can be understood in the context of RBI's broader concerns about NBFC lending practices and systemic risks. The central bank has been increasingly concerned about systemic practices where NBFCs mask underlying stress in their loan assets through evergreening techniques. Revolving credit facilities can potentially facilitate such evergreening by allowing borrowers to repeatedly draw down and repay funds, potentially concealing distress.
The proposal also aligns with RBI's broader regulatory measures to address the rapid growth of unsecured lending.
This rapid expansion has raised concerns about higher credit risks, with unsecured loans accounting for 51.9% of new NPAs in retail portfolios in H1FY25. Nearly 50% of unsecured loan borrowers already have other live retail loans, creating cross-default risks.
NBFCs currently offering popular flexi loan products will need fundamental restructuring to comply with the term loan-only requirement. Major players like Bajaj Finance, L&T Finance, and Aditya Birla Capital have built significant businesses around these products. The transformation requires eliminating limit restoration capabilities, converting unlimited withdrawals within limits to fixed numbers of permitted drawdowns, and removing interest-only EMI options that encourage revolving behavior.
For instance, Bajaj Finance's Flexi Loan products, which allow borrowers to withdraw funds as needed from a loan limit and pay interest only on utilized amounts, would need to be redesigned to prevent limit restoration after repayment. The company offers Flexi Term Loans and Flexi Hybrid Loans, where borrowers can make multiple withdrawals without additional charges and even pay interest-only EMIs for initial periods. These features would need to be eliminated or fundamentally restructured.
The prohibition will significantly impact revenue models of retail-focused NBFCs that rely on reusable credit lines. Current flexi models generate revenue through interest on utilized amounts, subscription fees for credit facility maintenance, withdrawal/transaction fees on multiple draws, and limit enhancement fees. The transition to term loans will reduce interest income due to lower average outstanding balances, eliminate recurring facility maintenance charges, and reduce fee income from fewer repeat transactions.
The shift to term loans could reduce this revenue stream by 15-25% in the short term due to lower utilization rates and reduced fee income. However, the long-term impact may be moderated by pricing adjustments and operational efficiencies gained through automation.
The restriction does not apply to NBFCs specifically authorized by the RBI to issue credit cards, recognizing that revolving credit is an inherent feature of credit card products. This exemption creates a significant competitive divide in the NBFC sector. To independently issue credit cards, NBFCs must meet a minimum Net Owned Fund requirement of ₹100 crore and obtain prior RBI approval. Many NBFCs entering this space start with a co-branded model with banks as a faster route, since it doesn't require meeting the full independent eligibility bar.
Credit cards provide multiple revenue streams including interest income from revolvers (18-24%), interchange fees on merchant spends (1-2%), annual fees, and transaction fees. They also create recurring reasons for customer engagement rather than one-time loan relationships. This gives authorized NBFCs a substantial competitive advantage in maintaining flexible lending models while others are restricted to term loans.
The transition from revolving credit to term loans is expected to improve NBFC asset quality metrics. Term loans have more predictable default patterns and better credit assessment due to fresh underwriting requirements for each new loan. While short-term NPA ratios may temporarily increase by 10-15 basis points as hidden stress becomes visible, medium-term improvement of 20-30 basis points is expected as cleaner underwriting takes effect.
Net interest margins may see modest improvement of 10-30 basis points. While revolving credit commands higher nominal rates (18-24%), term loans offer 100% utilization compared to 30-50% for revolving facilities, potentially increasing effective yields. However, this will be partially offset by the loss of fee income and higher operational costs for multiple loan processing.
Capital efficiency ratios should improve significantly.
This could improve CRAR by 100-150 basis points and reduce leverage ratios by 10-15% relative to owned funds.
The proposed restrictions will alter the competitive dynamics between NBFCs and banks.
However, banks maintain advantages in credit cards and lower cost of funds. The new regulations may slow NBFC growth rates by 10-15% as they adapt to term loan structures.
Fintech partnerships with NBFCs will require significant restructuring. RBI's digital lending guidelines mandate that disbursements and repayments flow only between lender and borrower accounts, eliminating intermediary routing through fintech accounts. This affects preferred BNPL models and requires NBFCs to modify their operating structures, take greater responsibility for customer conduct, and strengthen due diligence on lending service providers.
The transition presents substantial operational and technological challenges. NBFCs will need to modify loan management systems to prevent limit restoration, implement predetermined amortization schedules, and update interest calculation engines from utilization-based to full-sanction-based methods. Data migration from revolving to term loan structures requires careful planning to ensure accurate import of borrower data, loan details, and payment histories.
The cost-to-income ratio may deteriorate by 10-15 percentage points during the transition period due to technology investments, dual system operations, and training expenses. However, long-term improvement of 5-8 percentage points is expected through automation, which can reduce manual processing costs by 30-50%.
The proposed prohibition on revolving credit facilities represents a fundamental restructuring of the NBFC lending landscape. While short-term challenges are inevitable, including product redesign costs, revenue model disruption, and operational complexity, the long-term benefits include improved asset quality, better capital efficiency, and more sustainable profitability.
NBFCs that successfully navigate this transition will emerge with stronger balance sheets and enhanced competitive positions. The key will be strategic technology investment, effective change management, and focus on segments where term loans are preferred or sufficient. For credit card-authorized NBFCs, the exemption provides a significant competitive moat. For others, the path forward lies in specialization, operational efficiency, and potentially pursuing credit card authorization or co-branded partnerships to regain flexibility in customer offerings.
