RBI Wants to Take the “Revolving” Out of NBFC Lending — And the Industry Is Pushing Back Hard
Summary: The Reserve Bank of India has proposed amendments to the Reserve Bank of India (Non-Banking Financial Company) Credit Facilities Directions, 2026, under which an NBFC would generally be permitted to offer only credit products in the nature of term loans and would be prohibited from offering revolving credit products, except for NBFCs authorised to issue credit cards. The proposal defines a term loan as a fund-based facility carrying a fixed sanctioned principal, disbursed in one or more tranches and repaid according to a predetermined amortisation schedule, with the sanctioned limit not becoming available for reuse once repaid. Facilities permitting borrowers to draw, repay and redraw within an approved limit would fall within the proposed definition of revolving credit. The proposed restriction could therefore affect flexi loans, overdraft-style facilities, cash-credit lines and various digital lending products, as well as certain working-capital structures used in supply chain finance, factoring and lending against securities. Although the draft does not expressly state its rationale, the article notes RBI’s concerns around evergreening of loans and the possibility that revolving structures may allow fresh drawdowns to effectively regularise overdue exposures. The Finance Industry Development Council has urged RBI to reconsider the blanket restriction and permit limited redraws within a declining contractual ceiling, subject to safeguards preventing extension of maturity, enhancement of the sanctioned amount or use of fresh drawdowns to regularise overdue accounts. The proposed framework also raises questions for existing products because the draft does not specify a transition period. NBFCs and their advisors therefore need to map existing products against the proposed term-loan definition and assess the potential impact of any final regulatory framework.
Introduction
Every finance professional who has structured a working capital facility knows the appeal of a revolving line: the borrower draws what they need, repays when cash comes in, and the same limit becomes available again without a fresh sanction process each time. It is one of the oldest, most flexible tools in commercial lending. On August 6, 2026, the Reserve Bank of India proposed taking that tool away from almost every NBFC in the country — and the sector’s principal industry body has now formally asked the regulator to reconsider, in a letter that reveals just how deep this cuts into everyday lending practice.
What the Draft Actually Proposes
Through draft amendments to the Reserve Bank of India (Non-Banking Financial Company) Credit Facilities Directions, 2026 — building on the existing Credit Facilities Directions issued in November 2025 — RBI has proposed a single, blunt rule: an NBFC shall only offer credit products in the nature of term loans, and shall not offer any revolving credit products. The specific exception in the draft is for NBFCs authorised to issue credit cards, of which there are currently only two — SBI Card and BoB Financial Solutions (BoB Cards). On the present regulatory landscape, virtually every other NBFC — from the largest diversified lenders to small MSME-focused shops — would fall on the restricted side of that line if the draft is notified as it stands.
The draft does something RBI directions have not done with this precision before: it formally defines both terms. A term loan is a fund-based facility carrying a fixed sanctioned principal, disbursed in one or more tranches, and repaid strictly according to a predetermined amortisation schedule — either periodic instalments or a bullet payment. Critically, once repaid, the sanctioned limit cannot be restored or reused. Anything that doesn’t meet this description — any facility permitting a borrower to draw, repay, and redraw within an approved limit — falls into the newly defined category of revolving credit, and is therefore prohibited for non-card-issuing NBFCs.
Read plainly, that definition doesn’t just catch obvious revolving products. It sweeps in flexi loans, overdraft-style facilities, cash-credit lines, and a wide range of digital credit lines that fintech-NBFC partnerships have built their retail lending businesses around over the past several years. It also lands, more contentiously, on certain working-capital structures used in supply chain finance, factoring and lending against securities — though how squarely it lands depends on how the individual facility is drafted, a distinction that turns out to matter a great deal once the industry starts pushing back.
Why RBI Is Doing This
The August 6 draft itself doesn’t spell out its rationale in so many words. But the concern isn’t hard to reconstruct, and it isn’t purely an industry guess either: RBI has flagged evergreening risk around revolving-type credit lines on prior occasions, and once FIDC filed its formal response, its own safeguards were framed explicitly around addressing “the RBI’s concerns around evergreening of loans.” The mechanics are straightforward enough — a revolving structure lets a borrower draw fresh funds that effectively repay an earlier overdue amount, keeping an exposure looking current without any genuine reduction in indebtedness, in a way that’s harder to catch than it would be under a term loan’s fixed, disclosed amortisation schedule. Whether this specific draft is best read as a standalone anti-evergreening measure or as one piece of a wider push toward more transparent, independently verifiable repayment behaviour is a fair question — but it would be overreaching to present that wider narrative as something RBI has stated outright.
There is also a practical compliance detail that deserves attention: as drafted, the amendments take immediate effect on notification, with no transition period specified. That silence raises a genuine open question for the existing book — how already-sanctioned flexi loans, overdraft-style facilities and other products that don’t fit the new term-loan definition would actually be treated once the final directions take effect is something the draft simply doesn’t address.
The Industry’s Response
The Finance Industry Development Council, the NBFC sector’s representative body, wrote to RBI on August 27, 2026 — a day ahead of the August 28 comment deadline — asking the regulator to substantially soften the proposal. At the heart of FIDC’s ask is a single carve-out: let a borrower who pays down part of their principal early get that headroom back, rather than losing it permanently, so long as guardrails keep the facility from turning into the kind of open-ended evergreening tool RBI is trying to shut down.
The industry body’s argument is a practical one: a blanket restriction would force borrowers, particularly MSMEs, into taking a full term loan upfront rather than drawing only what they currently need, which raises their effective interest cost and discourages early repayment altogether — since a borrower who repays early under a pure term-loan structure permanently loses access to that portion of the facility. FIDC named a long list of products it believes were not the intended target but would be swept up regardless: supply chain finance, factoring, working capital demand loans, secured and unsecured MSME loans, vehicle dealer finance, loan-against-securities facilities, and various fintech-based lending products.
FIDC’s proposed middle ground is a distinction between genuine revolving credit — the credit-card or overdraft type RBI is clearly targeting — and what it terms a “limited redraw within a declining contractual ceiling”: a structure where a borrower can redraw only within the original sanctioned amount, cannot extend the facility’s maturity or increase the sanctioned sum through a redraw, and cannot use a fresh drawdown to regularise an account that is already overdue. Framed this way, FIDC argues, the safeguards address RBI’s actual evergreening concern without eliminating a financing structure that MSMEs and individual borrowers genuinely depend on for working capital that fluctuates with their cash flow.
What NBFCs and Their Advisors Should Do Now
Regardless of how the final directions land, this is a moment for finance and credit teams to map their entire product book against the draft’s term-loan definition today, not after notification. Every flexi loan, overdraft product, cash-credit facility, and fintech-partnered digital credit line needs to be tested: does it meet the fixed-principal, fixed-schedule, no-redraw test, or does it fall into the restricted category? For non-conforming products, model what a term-loan conversion does to revenue, to customer retention, and to loan documentation — because redesigning a live product mid-book, with no transition period contemplated in the draft, is not a task to begin after the fact.
For CAs and compliance advisors, the practical value right now lies in helping clients quantify exposure — how much of the current book is genuinely revolving versus a redraw product that might survive if FIDC’s proposed carve-out is accepted — and in preparing documentation that can demonstrate, product by product, that redraws stay within a declining ceiling rather than functioning as disguised evergreening. Whatever RBI ultimately decides, the direction of travel is unmistakable: revolving structures are going to need to prove their discipline, not just their utility.
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The author is a Chartered Accountant and writes on regulatory and financial compliance matters. Views expressed are personal and this article is intended for general awareness; readers are advised to seek professional advice before acting on any regulatory development discussed herein.
