The Reserve Bank of India has dropped a regulatory bombshell. In early August 2026, the central bank released draft amendments to the NBFC Credit Facilities Directions that would effectively ban non-banking financial companies from offering revolving credit facilities. This isn't just paperwork—it's a fundamental restructuring of how NBFCs like Bajaj Finance, Tata Capital, and Shriram Finance do business.
The draft defines a "term loan" as a facility where you borrow a fixed amount, repay it on a schedule, and once you've paid it back, that's it—the limit doesn't come back. Anything that lets you draw, repay, and redraw funds within a credit limit is now "revolving credit," and NBFCs can no longer offer it unless they're specifically authorized to issue credit cards. Only two NBFCs—SBI Card and BoB Cards—have that authorization.
This hits NBFCs right where it hurts. Analysts estimate revolving credit products account for about 15% of Bajaj Finance's AUM, with Tata Capital and Shriram Finance also having meaningful exposure. We're talking roughly ₹1-1.1 lakh crore in assets that would need to be restructured or wound down.
The central bank has been waving red flags for nearly two years. During supervisory inspections, RBI identified several specific concerns about how NBFCs were running these revolving facilities. First, some products looked suspiciously like credit cards but without the regulatory oversight that comes with card issuance. Second, NBFCs typically don't have the same visibility into customer bank accounts that banks do, making it harder to tell whether a borrower is repaying from genuine income or just shuffling money between loans. Third, there's a real worry about debt cycles—borrowers drawing funds, repaying, and drawing again without ever really closing the facility.
But here's the thing: the Finance Industry Development Council, which represents NBFCs, has been telling RBI that these products haven't actually shown adverse credit behavior. So why the blanket prohibition instead of targeted fixes? It comes down to regulatory clarity and enforcement. A blanket ban is easier to supervise than nuanced product-by-product restrictions, and it reinforces the line RBI wants to draw between banks and NBFCs—working capital should be predominantly a banking function.
Here's where the rubber meets the road. Replacing revolving credit with repeated term loans fundamentally changes the economics for NBFCs. Under a revolving facility, you do one comprehensive credit appraisal, and the customer can draw and repay multiple times. With term loans, every new borrowing need requires a fresh application, fresh documentation, fresh underwriting, and fresh servicing.
The cost implications are staggering. Credit appraisal costs could jump 300-400%. Documentation expenses might rise 200-250%. Servicing multiple loans for the same customer instead of one facility could increase costs by 150-200%. Overall, NBFCs are looking at a 250-400% increase in operational costs for the same credit volume.
These costs don't just disappear—they get passed on. MSMEs already pay 15-28% annually to NBFCs versus 10-12% for large corporates. With the proposed changes, effective borrowing costs could climb another 3-4 percentage points. For a ₹10 lakh loan over three years, that means paying roughly ₹1,829 more per month—a 24.8% increase in total interest costs. Many MSMEs operating on 8-15% profit margins would see those margins compressed by 20-40%.
The timing couldn't be worse for India's small businesses. MSMEs contribute nearly 30% of GDP but face a massive ₹30 lakh crore credit gap. Only 14-16% have access to formal credit channels. Revolving credit has been a lifeline because these businesses often have seasonal cash flows—60-70% of annual revenue might arrive in a 90-day window. They need to buy inventory before peak season, pay suppliers, and manage the gap between paying out and collecting in.
With revolving credit gone, NBFCs would need to develop alternative mechanisms. They're looking at invoice-based financing through TReDS platforms, supply chain finance structured against approved invoices, and technology-enabled term loans with faster processing. But here's the catch: credit disbursement times would jump from 6-10 days under the current revolving model to 17-26 days for new term loans. For seasonal businesses where timing is everything, missing a 2-3 week window can mean losing the entire opportunity.
This is where the regulatory arbitrage becomes stark. Banks can continue offering cash credit and overdraft facilities—essentially the same thing as revolving credit—because those products are explicitly permitted for them. NBFCs would be banned from offering functionally identical products. Banks enjoy funding costs 150-250 basis points lower than NBFCs thanks to access to CASA deposits. They have complete visibility into customer account activity for monitoring repayment behavior. Now they'd also have exclusive rights to flexible working capital finance.
The competitive landscape would shift dramatically. Banks would increase their market share in MSME lending, potentially from 60% to 65-70% of total credit. NBFCs would be forced to focus on secured lending, niche segments, and underserved markets where banks don't compete as aggressively. The level playing field that has allowed NBFCs to grow at 15-17% annually—faster than banks' 10-11%—would be fundamentally altered.
The industry isn't taking this lying down. Through FIDC, the Self-Regulatory Organisation for NBFCs, they're making coordinated representations to RBI. Their arguments focus on product differentiation—secured revolving facilities like supply chain finance are fundamentally different from unsecured consumer credit. They're emphasizing that these products serve thin-file customers who lack traditional collateral but have regular business activity and predictable cash flows. They're advocating for a risk-based framework with appropriate safeguards rather than a blanket prohibition.
Major NBFCs are also evaluating strategic alternatives. Bajaj Finance is leveraging its technology platform and 10.6 crore customer base to develop term loan products with embedded flexibility features. Tata Capital is focusing on its brand strength and group ecosystem for relationship banking and secured lending. Shriram Finance is doubling down on its dominance in vehicle finance and rural markets where it has 50% of its AUM.
The public consultation deadline is August 28, 2026. What happens next will determine whether NBFCs can adapt their business models to a term-loan-only world or whether RBI will provide calibrated exemptions for legitimate use cases like secured facilities and supply chain finance. Either way, the era of NBFCs competing with banks on flexible credit products appears to be drawing to a close.
