Mumbai, Aug 11: The Reserve Bank of India’s proposed restrictions on revolving credit facilities offered by non-banking financial companies (NBFCs) could lead to significant changes in the way flexible loans are offered, with analysts cautioning that some borrowers may face higher financing costs.
The RBI has proposed that NBFCs largely move towards loans with a fixed repayment schedule, limiting their ability to offer revolving credit facilities. Credit card issuers would remain outside the proposed restriction.
The move could have a direct impact on flexi loans and overdraft-style facilities, which allow borrowers to draw money when required and pay interest based on the amount actually used. Such products are commonly used by businesses and individuals to manage changing cash-flow needs.
Analysts believe lenders may respond by shifting customers towards conventional term loans or other structured credit products. While this could bring greater predictability to repayments, borrowers could lose some of the flexibility associated with existing credit lines.
For borrowers, particularly small businesses and self-employed customers, the difference could be significant. Under a conventional loan, a customer may have to take the full sanctioned amount upfront even when the money is not immediately needed. Any unused funds could remain idle while interest continues to accrue, potentially increasing the overall cost of borrowing.
The proposed changes could also prompt NBFCs to redesign their products rather than simply withdraw flexible credit facilities. Lenders may explore new structures that comply with the RBI’s framework while continuing to meet customers’ working-capital and short-term financing needs.
The RBI’s move is aimed at strengthening lending discipline and bringing greater consistency to NBFC credit practices. A fixed repayment structure could make the outstanding liability clearer for borrowers and reduce the possibility of repeatedly replenishing credit limits.
The timing is significant because NBFCs have become an important source of credit for households, small businesses and other borrowers outside the traditional banking system. Any major change in their lending models could therefore have a wider impact on access to finance.
For MSMEs, which often depend on flexible working-capital arrangements to manage inventory purchases, payments and uneven cash flows, maintaining access to convenient credit will remain particularly important.
The proposed framework is still subject to the regulatory process, and the final rules will determine how existing and new loan products are treated.
For now, the development is pushing NBFCs to reassess their lending models. The challenge will be to balance the RBI’s objective of stronger credit discipline with the need to keep borrowing flexible, affordable and accessible for customers.
If lenders successfully redesign their products, the transition could be gradual. But for borrowers who rely heavily on revolving or flexi-credit facilities, the eventual shift could mean less flexibility and potentially higher financing costs.
