The Reserve Bank of India is proposing a ban on revolving-credit facilities for most non-banking financial companies (NBFCs) [1].
This shift represents a significant tightening of credit availability in India. By restricting lenders to term-loan products, the central bank aims to reduce systemic risk and prevent the buildup of unstable debt cycles within the shadow banking sector.
The RBI is nudging both banks and NBFCs to limit these facilities to curb credit-risk exposure [1, 2]. Under the proposal, most NBFCs would be prohibited from offering revolving credit, leaving only term loans as a permitted product [2]. This move is part of a broader effort to align India's financial regulations with Basel Committee standards [3].
In addition to the restrictions on NBFCs, the central bank is moving to tighten leverage norms for banks [3]. These changes are designed to improve overall financial stability by ensuring banks maintain a more conservative balance between their capital and their total exposure.
The proposed restrictions on NBFCs are tied to the 2025 capital adequacy directions [3]. The central bank has requested public comments on the proposed changes to bank leverage norms by August 28 [3].
Financial analysts said the RBI has been nudging banks on specific domains, including revolving credit, to ensure a more resilient banking ecosystem [1]. The focus on term loans over revolving lines of credit suggests a preference for fixed repayment schedules over flexible, open-ended borrowing.
“The RBI is proposing a ban on revolving-credit facilities for most non-banking financial companies.”
The transition from revolving credit to term loans reduces the flexibility of borrowers but increases the predictability of repayments for lenders. By aligning with Basel Committee standards, the RBI is prioritizing long-term systemic stability over short-term credit growth, likely to prevent the kind of liquidity crises that have historically impacted the NBFC sector in India.
