RBI's proposed curbs on revolving credit push NBFCs back to the drawing board

What happened

The RBI has proposed restricting non-bank lenders to term loans, which would effectively bar revolving credit facilities such as flexi-loans; the proposal is not final. Bajaj Finance and Tata Capital said they are exploring ways to restructure existing credit facilities as term loans to maintain lending to small businesses and MSMEs.

Proposed

Global impact / market context

If adopted, the restriction could change how NBFCs provide working funds: borrowers would repay on scheduled instalments rather than draw, repay and redraw from an approved limit. Lenders may need to redesign products to preserve credit supply, while businesses could otherwise seek funding from banks.

Analyst inference

The draft is intended to address risks to the financial system, prevent loan evergreening—which means extending or replacing loans to hide repayment problems—and reduce NBFCs’ liquidity vulnerabilities, or difficulty meeting cash needs. If adopted, the restriction could require lenders to redesign products to keep credit flowing to small firms.

Analyst inference

What to watch

1. Watch for the RBI's next steps on the draft, including whether it adopts restrictions on revolving credit or clarifies which NBFC lending arrangements would be allowed. Analyst inference
2. Track whether Bajaj Finance and Tata Capital turn their exploration into term-loan products, and whether the changes preserve credit availability for MSMEs and small businesses. Analyst inference
3. Observe whether affected businesses shift to banks for funding if NBFCs cannot offer revolving facilities, which could redirect borrowing demand between lenders. Analyst inference

Evidence

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