The Reserve Bank of India has proposed new restrictions on revolving credit facilities offered by non-banking financial companies (NBFCs) [1, 2].
These proposed rules could fundamentally change how millions of borrowers access flexible credit, potentially shifting the shadow-banking sector away from reusable credit lines toward rigid term loans.
The draft proposal targets products such as flexi loans, reusable credit lines, and overdraft-style loans [1, 2]. Under the proposed framework, the central bank aims to move lending toward term-loan structures. This shift is intended to reduce overall credit risk and improve financial inclusion across the country [1, 2].
The Finance Industry Development Council (FIDC), which represents the NBFC sector, has submitted a counter-proposal to the regulator [1, 2]. The industry body opposes the curbs, arguing that the measures would limit flexibility for borrowers who rely on the ability to borrow, repay, and borrow again [2].
NBFCs have traditionally filled gaps in the formal banking system by providing more agile credit options than traditional banks. The FIDC said the proposed restrictions would hurt the shadow-banking sector by removing the primary advantage of these flexible products [1, 2].
Regulators have expressed concern that revolving credit can lead to unsustainable debt cycles if not properly managed. By enforcing term-loan structures, the RBI seeks to ensure that loans are repaid over a fixed schedule, reducing the likelihood of long-term debt traps [1, 2].
The disagreement highlights a tension between the regulator's goal of systemic stability and the industry's goal of consumer accessibility. The RBI has not yet finalized the rules following the FIDC's submission [1, 2].
“The central bank aims to move lending toward term-loan structures.”
This regulatory clash reflects a broader effort by the RBI to tighten oversight of India's shadow-banking system. By restricting revolving credit, the central bank is prioritizing the prevention of systemic risk and asset bubbles over the convenience of flexible borrowing. If implemented, these rules will likely increase the cost of credit for small borrowers and force NBFCs to redesign their primary product offerings to comply with stricter term-loan mandates.
