RBI's Proposed Ban on Revolving Credit: What NBFCs Need to Watch

6 days ago

5 min read

The Reserve Bank of India has proposed a change that could reshape how NBFCs design their lending products. Draft Amendment Directions issued on August 6, 2026 would restrict NBFCs to offering only term loans, with revolving credit permitted solely for RBI-authorized credit card issuers. Comments on the draft closed on August 28, 2026, and the rule takes effect only once formally notified. It is not law yet, but the direction is clear enough that lenders should start thinking through what it would mean for how products are built, documented, and monitored.

What the Draft Changes, and Why

The New Definitions

The draft inserts two new definitions into the existing Credit Facilities Directions, 2025.

Revolving credit is defined, in effect, as anything that fails the term loan test. Under the new restriction, NBFCs would only be allowed to offer term loans. The only exception applies to NBFCs authorized to issue credit cards, currently just two entities.

Why RBI Is Concerned

Two arguments run through the draft.

Evergreening. Revolving structures can let a borrower service an old loan by drawing fresh credit, rather than repaying from actual cash flow. Banks can often see this pattern because they hold the borrower's deposit accounts. NBFCs generally cannot, which makes the practice harder to detect and, in RBI's view, easier to hide.
Funding mismatch. Banks lend largely from deposits. NBFCs fund themselves through wholesale borrowing and bond issuance. A revolving asset sitting against that kind of funding creates a different risk profile than the same product would on a bank's balance sheet, since NBFCs have less flexibility to absorb a mismatch between how the asset behaves and how the liability is structured.

This is not a sudden shift. RBI had informally flagged concerns about perpetual credit lines as early as March 2025, and reports at the time pointed to tens of thousands of crores in exposure across retail-focused NBFCs. The August 2026 draft formalizes what had been informal supervisory pressure.

The Demand/Call Loan Repeal

The draft also repeals the separate framework that used to govern demand and call loans. Demand and call loans are not revolving credit in the draw-repay-reuse sense. They are typically a single advance, repayable on demand or call by the lender rather than reused. But they also do not carry a predetermined amortization schedule, so they fail the new term loan test on that ground alone. Removing their dedicated framework is consistent with that category having no clear place under the new rules. The draft does not say how outstanding demand or call loans on NBFC books today should be treated during the transition, which is a gap lenders using these products will want RBI to clarify.

The Classification Problem

The harder question is not the ban itself. It is where the line falls. Several NBFC products allow redraws within a sanctioned limit. But they do not function like a credit card or an overdraft. Industry submissions to RBI have flagged specific examples: supply chain finance, factoring, working capital demand loans, secured and unsecured MSME loans, vehicle dealer finance, and loans against securities.

What the draft appears to target: open-ended credit lines. A borrower can withdraw and repay repeatedly, with no fixed maturity. The total exposure never has to decline over time. Consumer flexi-loans and business credit lines built on this logic are the clearest fit. Demand and call loans are caught too, though for a different reason: they lack a predetermined repayment schedule, so they fail the term loan test even though they are not revolving in the reuse sense.

What is being argued as legitimate: redraws linked to a specific transaction or working-capital need, within a fixed and often declining limit. A supply chain finance facility that funds specific invoices works this way. So does a working capital demand loan redrawn against a limit tied to a borrower's operating cycle. Both are structurally different from a facility built for indefinite rollover. Industry groups have asked RBI to treat a transaction-specific drawdown within a declining limit differently from a facility that lets a borrower reset the same exposure forever.

The distinction matters. A blanket definition, applied too literally, would catch products that were never built to mask distress. This is the most active point of negotiation in the comment process, more so than the headline restriction on flexi-loans.

Operational Implications for Lending Infrastructure

For lenders, the practical work sits less in the policy debate and more in system design.

Product configuration: Any product built on repeated draw-repay-reuse logic needs a fresh look against the term loan definition. It will need to be restructured, or documented as a qualifying exception.
Classification and audit trail: Lending systems will need to show, product by product, why a facility meets the term loan definition or fits an accepted working-capital structure. This is a documentation and configuration task as much as a legal one.
Visibility into account behavior: As revolving structures are converted or wound down, it should become easier to see which accounts were genuinely performing well. Accounts kept current only through repeated redraws should also become easier to spot. That clarity may be one of the more lasting effects of this change, whatever the final line ends up being.

None of this is a simple relabeling exercise. It needs lending platforms flexible enough to reconfigure limit logic and disbursement rules by product, rather than one template applied across the whole book.

Market Reaction and What Could Still Change

The reaction has been clear since the draft was released:

NBFC stocks fell in the days after the announcement.
Brokerages flagged Bajaj Finance as the most exposed, given the size of its flexi-credit business.
Several large NBFCs have sought meetings with the RBI to raise concerns.
The Finance Industry Development Council made a formal submission on behalf of the sector, focused mainly on the classification question described above.

A broader critique is also in circulation. Some argue that a blanket restriction across all NBFCs is a disproportionate response. The underlying risk, they say, may sit mostly with a smaller set of large, deposit-adjacent lenders. Closer supervision of those entities, in this view, could address the concern without removing a product category for the whole sector.

Given this pushback, the final directions may differ from the current draft. The clearest area for change is where the line falls for working-capital-linked products. Lenders would be reasonable to treat the draft as a strong signal of direction, not a finished rulebook.

Where This Leaves Lending Infrastructure

Whatever the final wording, NBFCs will need lending platforms that can adapt. Product definitions and limit structures need to change without a ground-up rebuild each time regulation shifts. OneFin's LOS and LMS infrastructure is built for that kind of change. Product configuration, limit and disbursement logic, and monitoring workflows can be adjusted as classifications evolve, rather than rebuilt from scratch. This flexibility does not resolve the policy questions still being debated. But it does lower the cost of adapting once they are settled.

The Takeaway

RBI's proposed restriction on revolving credit is still a draft. The classification of working-capital-linked products remains genuinely unresolved. But the direction is fairly clear. NBFCs will need to justify product structures against a sharper regulatory definition. Lending infrastructure that can absorb that kind of change without disruption will be better placed than infrastructure that cannot.

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