On 6 August 2026, RBI released draft amendments to itsNBFC (Credit Facilities) Directions, 2025. A new paragraph, 108A, would permit NBFCs to offer only term loans and bar any revolving credit product, with the sole carve-out for some entities authorised to issue credit cards. The most plausible goal — consistent with RBI's efforts to strengthen the financial ecosystem — is to prevent ever-greening: letting a struggling borrower redraw against the same facility indefinitely, masking deteriorating credit quality instead of forcing timely stress recognition. 

Several other reasons plausibly sit alongside this. Repeated redrawing against the same limit can trap vulnerable borrowers in perpetual debt cycles, keeping over-leveraging build up hidden from view, rather than surfacing through a fresh assessment each time credit is extended. The restriction may also reflect a broader concern with the rapid growth of high-risk, unsecured retail credit, where revolving structures have made it easiest for exposure to build up quickly and quietly. It may also reflect an intent to plug regulatory arbitrage and bring greater regulatory clarity.

A term loan is a fixed sanctioned amount, disbursed in tranches, repaid on a predetermined schedule, and once repaid, the limit cannot be restored. Revolving credit, by contrast, carries a pre-approved limit that can be drawn, repaid, and redrawn repeatedly without a fresh sanction each time, as long as the balance stays within the ceiling — the equivalent of refuelling, rather than a one-time fill. Credit cards, cash credit, and overdrafts are common examples.

Two features sharpen the draft's impact. There is no minimum tenor in the definition, so a thirty-day bullet facility qualifies exactly as validly as a five-year one — the central technical problem this piece goes on to identify. The amendment also quietly deletes the separate "Demand/Call Loans" category from the Directions altogether, alongside the revolving-credit ban — closing off what might otherwise have been a residual route for a flexible, non-amortising repayment structure to survive under a different label. And no transition period is proposed: the change takes effect immediately on notification, with no glide path to unwind existing books. A restriction taking effect this immediately is unusual, and the compelling reason for the urgency, as well as the underlying rationale, deserves to be explicitly articulated.

The Loophole
Because no minimum tenor is specified, a term loan and a revolving facility become almost indistinguishable in economic substance the moment an NBFC simply re-sanctions a fresh short-tenor loan — say thirty days — back-to-back to the same borrower. Each loan is, by the letter of the definition, fully compliant: fixed amount, fixed schedule, fully repaid before the next begins. But a borrower who is quietly deteriorating can still be carried indefinitely through repeat short-cycle sanctioning, exactly as under a revolving line — the redraw simply now requires a fresh loan number instead of a redraw instruction. The rule changes the paperwork trail, not necessarily the underlying capacity to evergreen a weak exposure, unless RBI separately polices repeat re-sanctioning to the same borrower.

The ALM Problem
The draft, if finalised in the present form, may also lead to collateral damage on the balance-sheet side. Revolving facilities are bucketed for liquidity purposes on behavioural maturity; term loans are bucketed on contractual schedule. Forcing every product into term-loan form shifts bucketing from behavioural to contractual, which can concentrate cash flows and  possibly risk breaching Scale Based Regulation gap-tolerance limits through a measurement-lens change alone, not genuinely higher risk. NBFCs may respond by repackaging working-capital lines into longer single-tenor loans (12–24 months), stretching asset duration; for deposit-taking NBFCs (NBFC-D), if deposit tenor preferences stay anchored to existing patterns, assets can outlive the liabilities funding them. The absence of a transition period sharpens this, since an overnight re-bucketing of an entire flexi-loan/overdraft book could trigger an apparent gap-tolerance breach reflecting a definitional discontinuity, not a genuine liquidity risk. 

This follow-on has so far been treated by commentators as a product-definition change alone — but RBI will may need to correspondingly recalibrate the underlying ALM bucketing and LCR guidance once the term-loan definition is finalised.

The Trade-Offs
“It Just Morphs Into Short-Term Loans” — A Fair Shorthand, With a Nuance

The facility does not morph as a single evolving loan; it may be replaced by discrete short-tenor term loans, each disbursed and repaid in full, then re-sanctioned fresh each cycle. NBFCs face two broad paths: keep re-sanctioning short bullet loans (30/60/90 days) to mimic prior revolving behaviour, preserving short duration but adding heavy operational load each cycle; or issue longer single-tenor loans (12–24 months) sized for peak need, avoiding repeat-sanctioning cost but taking on duration-mismatch risk directly. Larger, better-capitalised NBFC-Ds will likely favour the short-tenor repeat route; smaller, thinner-margin players may drift toward longer tenors — where real ALM stress is likely to concentrate.

Does This Create a Cost-Effective Incentive Toward Unsecured Lending?
A weaker claim than it first appears. The restriction turns on structure — revolving versus term, redraw or not — not on security type, and applies equally to secured and unsecured facilities. Secured revolving facilities carry recurring collateral-administration costs — charge creation, valuation refresh, registration — re-triggered on every renewal once converted to a repeat short-tenor loan, while an unsecured repeat loan carries none, making it relatively cheaper to re-sanction. That is a real but secondary, cost-based nudge, not evidence that the rule favours unsecured lending by design, and it is counterbalanced by RBI's own risk-weight increases on unsecured lending, which remain in force. On balance, the draft creates a relative cost incentive toward unsecured products at the point of conversion — not a standalone incentive generally — which the existing capital regime should keep in check for well-run NBFC-Ds.

The Fix This Analysis Points To
If the loophole is a limit that can always be fully restored, the fix is a limit that cannot be. A redraw ceiling that only ever declines with amortisation — never resets, never exceeds the original sanction, and cannot fund a missed instalment or extend maturity — forecloses the mechanism identified above, since it removes the one feature that lets a facility mask deterioration. This follows directly from the balance-sheet mechanics, independent of any product-continuity argument for preserving revolving credit.

The Segment Most Exposed: Working Capital Lending
Working capital lending is most exposed, since a fixed-disbursement, no-redraw term loan is structurally the wrong-shaped instrument for a fluctuating funding need. MSMEs served by NBFCs are highly exposed, relying on revolving lines precisely because banks underserve them here; large corporates face low exposure, since their working capital mostly comes from bank cash-credit facilities untouched by this direction.

The impact runs through higher cost, reduced availability as smaller NBFCs exit small-ticket working capital, migration toward banks at the top end, and genuine contraction at the bottom end for borrowers with no bank fallback. A declining-ceiling carve-out would substantially defuse this, without reopening the ever-greening loophole RBI is right to want closed.

Segmentation of Credit Markets: Risks and Benefits
A structural side-effect is a sharper split between banks, which retain revolving products largely untouched, and NBFCs, pushed toward term structures regardless of borrower fit. The benefits are real: cleaner supervisory boundaries, a narrower regulatory-arbitrage channel, and reduced tail-risk concentration in the NBFC sector. The risks run the other way: financial exclusion of MSMEs and thin-file borrowers with no bank alternative; concentration rather than elimination of systemic risk; dampened competitive pressure on credit-line innovation; and migration to less-regulated informal credit. This is a real trade-off, not a clean improvement — a carve-out preserving revolving structures for working-capital-shaped lending would address much of it directly.

Nothing about the final shape of this rule is decided. RBI has signalled it will weigh the comments received before taking a final view, and its typical two-to-three-month gap between comment deadline and final notification suggests some compromise — most plausibly a capped or declining-redraw structure — is a reasonably likely landing point within the next couple of months. RBI could equally hold the restriction as drafted, or reach for a different mechanism, such as a minimum tenor floor.