RBI’s Revolving Credit Curbs Could Reshape NBFC Lending

Among a series of recent RBI regulations aimed at strengthening the financial system, including ECL, Basel 3.1/Basel IV and draft guidance on harmonisation of lending rates, the RBI issued yet another draft regulation on August 6, 2026, stating that NBFCs shall offer only credit products in the form of term loans and not revolving credit products.

Under the draft, the RBI clearly defines a term loan as a fund-based facility with a fixed sanctioned amount, disbursed in one or more instalments and repaid on a predetermined schedule. Once an amount is repaid, the limit cannot be restored or reused.

Hence, anything that lets a borrower draw, repay and redraw within an approved limit now falls under ‘revolving credit’. That includes something many NBFC borrowers have quietly relied on for years: top-up or reusable loan arrangements. Until now, ‘term loan’ and ‘revolving credit’ were not formally or precisely defined for NBFCs. That ambiguity allowed some NBFCs to offer revolving-style products, including top-up loans and reusable limits, without being clearly classified or capitalised for that risk profile.

Risk Containment
The clarification in the draft regulations regarding term loan products could be a risk-containment measure. Revolving credit behaves very differently from a term loan. Utilisation is harder to predict, while higher redraw risk poses liquidity risks and can potentially trap borrowers in a cycle of repeated borrowing without allowing them to deleverage fully.

NBFCs factor these risks into their pricing strategy but may not reflect the added volatility in credit usage, leaving capital adequacy exposed to greater credit and liquidity risks. This latent risk may worry the regulator as NBFC operations grow in size and scale.

Another risk for the borrower is that a revolving facility can be continuously topped up, allowing the outstanding balance to grow quietly over time without ever fully closing out or forcing a proper assessment of whether the borrower can clear the debt. A term loan format forces periodic repayment and reassessment.

If a meaningful share of NBFC lending has effectively functioned as revolving credit without being risk-weighted or provisioned accordingly, it could represent a hidden systemic exposure. Closing that gap reduces the kind of quiet, compounding risk that can precipitate a crisis, as funding mismatches at IL&FS eventually did when they contributed to a system-wide liquidity shock in 2018.

The RBI’s objective may be to address risk concentration among entities and the formation of credit-trap behaviour among borrowers. Such prolonged practices can pose credit risk at any time, without giving NBFCs enough time to manage the resulting deterioration, possibly creating systemic risks.

This is not a standalone move. It landed within weeks of the RBI’s interest-rate harmonisation draft and a fresh ban on prepayment penalties for MSE and individual floating-rate loans. Taken together, the measures suggest a broader attempt to tighten NBFC lending conduct across several fronts rather than a one-off intervention.

Of the 9,400 NBFCs currently regulated by the RBI under the scale-based regulatory framework, only two are authorised to issue credit cards, which are exempt from the proposed guidelines.

Inclusion Trade-off
There is no ambiguity: only banks can accept and create demand deposits on the liability side and grant cash credit, overdrafts, or lines of credit for working capital on the asset side. NBFCs can grant only term loans for a fixed tenure and cannot permit rollover.

But law and practice differ. Over time, NBFCs have built substantial credit portfolios, some of which may be renewable. Some borrowers may be sub-prime, lack a proper credit history or adequate financial and digital literacy, or may not have access to banks for institutional working capital. They often turn to NBFCs for credit support. Regulatory arbitrage between banks and non-banks is inherent in their functioning and regulatory oversight.

If a product functions like a cash-credit or overdraft facility, it should be regulated, capitalised and disclosed like one, not dressed up as a series of separate term loans to sidestep basic credit risk-mitigation requirements. That would improve transparency and bring greater order to credit flows.

Banks already cannot offer this kind of loosely regulated revolving credit outside proper cash-credit and overdraft frameworks, which come with their own capital and provisioning requirements. The proposal therefore closes a gap that allowed some NBFCs greater flexibility than banks in offering a functionally similar product. But that flexibility has also enabled NBFCs to serve borrowers with growth potential who cannot meet conventional banking requirements.

After GST was introduced and UPI apps became part of retail sector operations, more borrowers began generating formal credit histories. Digital footprints are driving some shift, but it will take a long time for the informal borrowing community to connect with the mainstream banking system. Therefore, both banks and non-banks are needed to harness growth potential, and they reinforce each other in building enterprise.

A drill-down into the data indicates that banks have a borrower base of about 400 million, with outstanding credit of ₹215 trillion, while NBFCs serve around 300 million borrowers with a credit pool of ₹45 trillion as of March 2026. Many could be borrowers of both banks and NBFCs.

Notwithstanding the outstanding loan amount, NBFCs contribute significantly to fresh credit inclusion, accounting for 50 million to 70 million unique borrowers who may be entirely outside the banking system or sub-prime emerging entrepreneurs. Their borrowing supports the livelihoods of many who are underserved or unserved by commercial banks. The lower-income segments of society are particularly closely connected to the NBFC network.

Another 60 million to 70 million microfinance borrowers depend entirely on NBFCs for credit access. Borrowers may overlap across NBFCs and banks, especially as fintech and digital lending apps become popular vehicles for low-value credit. Informal community borrowing from NBFCs is enormous, as many borrowers have shifted away from traditional moneylenders.

A small cohort of Upper Layer and Middle Layer NBFCs, including Bajaj Finance, Shriram Finance, Cholamandalam, Mahindra Finance, Muthoot Finance and Manappuram Finance, along with specialised fintech NBFCs, accounts for more than 75% of the total retail customer base.

Care must be taken to ensure that borrowers are not pushed back towards moneylenders and trapped in debt carrying usurious interest rates. The benefits of financial sector reforms have only begun to reach the lower strata of society through digital and financial inclusion, and NBFCs, with their greater operating latitude, have played a critical role in providing last-mile credit support. Protecting this financial inclusion is important for advancing the broader Viksit Bharat goals.

Way Forward
With more granular data and robust research support, the RBI can better understand the implications of each draft guideline it issues. The transition should also be aligned with the readiness of financial institutions to move to the new regime, much as the financial sector was given time to adjust during the implementation of Basel III.

The RBI guidelines on recovery agents for NBFCs, implemented from July 1, 2026, reflect the RBI’s concern for MSME and farm-sector borrowers with no strong credit history who cannot borrow from other sources. Unless the transition to the new regime is suitably timed and existing facilities are treated with a practical eye, the pain points faced by borrowers and institutions could impede the broader purpose of financial-sector reforms intended to benefit the masses.

As of now, stakeholder comments are due by August 28. The draft proposes that the restrictions apply to fresh loans from the date the final guidelines are issued. Existing facilities would come under the new framework when they are reviewed, or as specified in the final directions.

More significant is the treatment, and possible grandfathering, of existing NBFC loan facilities, which have become the lifeline for many low-value entrepreneurs and support the livelihoods of millions.