RBI’s restrictions on revolving credit | Explained
The Reserve Bank of India (RBI) has released draft amendments to the RBI (Non-Banking Financial Company) Directions, 2025, proposing that most non-banking financial companies (NBFCs) be permitted to offer only term-loan credit products, and no longer be allowed to offer revolving credit products.
The draft formally defines "term loan" (a fixed principal amount disbursed upfront or in instalments, repaid on a predetermined schedule, with the sanctioned limit not automatically restored on repayment) and "revolving credit" (any fund-based credit facility that does not meet the term-loan definition, allowing repeated drawdown, repayment and reuse of a sanctioned limit).
NBFCs specifically authorised by the RBI to issue credit cards are exempted from the restriction and may continue to offer revolving, card-based credit.
Public comments on the draft are invited until 28 August 2026; if notified, the amendments would take effect immediately.
Revolving Credit vs Term Loan
A term loan is a credit facility with a fixed sanctioned amount, disbursed in a lump sum or instalments, and repaid according to a fixed amortisation schedule; once repaid, the credit limit is not automatically restored. Revolving credit, by contrast, allows a borrower to draw, repay and redraw funds repeatedly up to a sanctioned limit without needing fresh approval — common examples include credit cards, overdraft facilities and certain lines of credit. The distinction matters for credit-risk assessment because revolving facilities make it harder to verify whether repayments are funded by genuine income or by fresh borrowing (a debt-rollover risk).
Key Details
- Term loan: fixed principal, fixed repayment schedule, limit not restored on repayment.
- Revolving credit: any fund-based facility not meeting the term-loan definition; limit reusable after repayment.
- The RBI's draft is the first instance of the regulator formally codifying these two definitions for NBFCs in a single directions framework.
The RBI's draft restricts most NBFCs to offering only term loans, effectively barring them from revolving credit products such as flexible credit lines, except where the NBFC is separately authorised to issue credit cards.
Non-Banking Financial Companies (NBFCs): Regulatory Classification
NBFCs are companies registered under the Companies Act that carry on financial activities (lending, investment, etc.) but do not hold a banking licence and cannot accept demand deposits like savings/current accounts. They are regulated by the RBI under the Reserve Bank of India Act, 1934 (Chapter III-B), with a scale-based regulatory framework (effective October 2022) classifying NBFCs into Base, Middle, Upper and Top Layers based on size, activity and perceived systemic risk, with progressively stricter norms for higher layers.
Key Details
- Statutory basis: RBI Act, 1934, Chapter III-B (registration and regulation of NBFCs).
- Scale-Based Regulation (SBR) framework effective October 2022: NBFC-Base Layer, Middle Layer, Upper Layer, Top Layer.
- Only two NBFCs are currently authorised by RBI to issue credit cards: SBI Card and BoB Financial Solutions (BoB Cards).
The revolving-credit restriction applies across the NBFC sector regardless of layer, with a narrow carve-out only for the handful of NBFCs specifically licensed for credit-card issuance.
RBI's Prudential Tightening on Unsecured Retail Credit
The revolving-credit curb follows a series of RBI measures since November 2023 aimed at moderating rapid growth in unsecured retail lending. In November 2023, the RBI raised risk weights on consumer credit exposures of banks and NBFCs by 25 percentage points (to 125% for most unsecured retail loans, excluding housing, education, vehicle, gold-jewellery and microfinance/SHG loans), and separately raised risk weights on bank lending to NBFCs, citing high growth in small-ticket unsecured loans and rising delinquencies, often driven by fintech-NBFC lending partnerships.
Key Details
- November 16, 2023: RBI raised risk weight on unsecured consumer credit exposures of banks/NBFCs from 100% to 125%.
- Exemptions from the 2023 hike: housing loans, education loans, vehicle loans, gold-jewellery loans, microfinance/SHG loans.
- Risk weight = capital a lender must hold against an exposure under Basel-based capital adequacy norms; higher risk weight raises the effective capital cost of lending.
The 2026 revolving-credit restriction is a continuation of this multi-year prudential tightening cycle, targeting a specific product structure (revolving credit) rather than just capital buffers, to curb debt-rollover risk in the fintech-NBFC unsecured lending space.
- Draft amendments to RBI (Non-Banking Financial Company) Directions, 2025 released for public comment; feedback window closes 28 August 2026.
- Restriction: NBFCs (other than those authorised for credit cards) may offer only term-loan products, not revolving credit.
- Only two NBFCs currently hold RBI authorisation to issue credit cards: SBI Card and BoB Financial Solutions.
- Prior related RBI measure: risk weight on unsecured consumer credit raised from 100% to 125% effective 16 November 2023.
- Statutory basis for NBFC regulation: RBI Act, 1934, Chapter III-B; Scale-Based Regulation framework effective October 2022.