Finance

RBI Moves to End NBFC Revolving Credit

The RBI's draft to bar non-bank lenders from offering revolving credit wiped ₹55,000 crore off the Bajaj group. We unpack the rule, the mechanics of flexi loans, and what it means for NBFC growth, margins and systemic risk.

By The Indian Markets Desk 11 min read

A single draft circular, running to a few pages, erased roughly ₹55,000 crore of shareholder value from one corporate group in a single trading session. On Friday 7 August 2026, shares of India's largest private-sector non-bank lender, Bajaj Finance, fell almost 6 per cent, dragging Tata Capital and L&T Finance down with it, after the Reserve Bank of India (RBI) proposed the day before that most non-banking financial companies (NBFCs) should stop offering revolving credit and lend only through conventional term loans (Business Standard). The reaction was dramatic; the underlying earnings maths, as we shall see, is far more modest. That gap between price and fundamentals is precisely what makes this the most consequential Indian markets story of the week.

What happened?#

On Thursday 6 August 2026, the RBI released draft amendments to its Credit Facilities Directions, 2026, proposing that NBFCs be permitted to extend only term loans and be barred from providing revolving credit facilities (Business Standard; Business Today). The draft defines a term loan narrowly: a fund-based facility with a fixed sanctioned amount, disbursed in one or more instalments and repaid on a predetermined amortisation schedule, where the sanctioned limit cannot be restored or replenished once repaid.

Two carve-outs matter. NBFCs authorised by the RBI to issue credit cards are exempt, because revolving credit is intrinsic to a card. Bullet-repayment loans have also been kept outside the proposal (Business Standard). The central bank has invited comments from regulated entities and the public until 28 August 2026, after which final directions may follow.

The market moved immediately. Bajaj Finance, the lender with the highest exposure to flexi-credit products, fell nearly 6 per cent; Tata Capital declined around 3 per cent; and L&T Finance dropped more than 2.5 per cent (Business Standard). Bajaj Finance and its parent Bajaj Finserv together shed roughly ₹55,000 crore in market capitalisation (Whalesbook).

Background: what is revolving credit, and why do NBFCs love it?#

A term loan is the plain-vanilla product most people recognise: you borrow a fixed sum, receive it up front, and repay it on a set schedule of equated instalments. Once you have repaid, the facility is closed; to borrow again you must apply afresh.

Revolving credit works differently. The lender sanctions a limit—say ₹5 lakh—and the borrower can draw down, repay, and draw again, repeatedly, without a new application each time. A credit card is the household example; overdraft accounts and business working-capital lines follow the same logic. Bajaj Finance built a large, profitable franchise on a variant it markets as the Flexi Loan and Flexi Hybrid Loan, which lets customers withdraw already-repaid amounts on demand (IndMoney).

For lenders, revolving products are attractive on three counts. They deepen customer stickiness, because an open line keeps the borrower engaged. They carry higher yields than term loans, typically 50 to 100 basis points more, compensating for greater flexibility and risk. And they generate fee income on repeated drawdowns. (A basis point is one-hundredth of a percentage point, so 100 basis points equals 1 per cent.)

The RBI's concern is the mirror image of that appeal. Because a revolving line can be redrawn indefinitely, it can mask evergreening—the practice whereby a borrower who cannot generate genuine cash flows services an old loan by taking fresh drawdowns, so that stress stays hidden from the lender's books (Business Standard). Banks have current-account visibility into a borrower's operating cash flows; NBFCs generally do not, which makes such practices harder for them to detect. Forcing amortisation—scheduled repayment that steadily reduces principal—makes distress surface earlier.

Market implications#

For equities, the immediate read-through is to the NBFC complex, but exposure is uneven. IIFL Capital estimates flexi-credit products account for about 15 per cent of Bajaj Finance's consolidated assets under management (AUM) and nearly 20 per cent of its standalone loan book (Business Standard). Tata Capital's exposure is put in the high single-digit to low double-digit range; Cholamandalam Investment and Finance sits below 1 per cent; L&T Finance and Poonawalla Fincorp have negligible exposure. In other words, this is a Bajaj-centric shock with a diversified tail, not a sector-wide solvency event.

For fixed income and bank funding, the proposal is broadly neutral to mildly positive: shifting NBFC books towards amortising term loans improves the predictability of cash flows that back securitisation pools and bond repayments. For the fintech ecosystem, the read is sharper. Many digital lending journeys—app-based credit lines, buy-now-pay-later-style facilities and co-lending partnerships—are structured as reusable limits. PL Capital notes that any reusable credit line, overdraft facility or flexi-loan product offered by NBFCs across corporate, MSME and unsecured personal segments is likely to be affected (Business Standard). Product and engineering teams may need to re-architect these flows so that each incremental borrowing is treated as a fresh loan.

The macro backdrop is supportive, which limits contagion. Days earlier, on 5 August, the Monetary Policy Committee held the repo rate at 5.25 per cent with a neutral stance, projected FY27 GDP growth of 6.7 per cent and trimmed its inflation forecast to about 5 per cent (India Infoline). India's foreign exchange reserves also rose $10.5 billion to $692.87 billion, the biggest weekly gain in over six months (Business Standard). A stable rate and liquidity picture means this is a targeted regulatory adjustment, not a system under stress.

Technical deep dive: sizing the earnings hit#

Here the numbers diverge sharply from the share-price reaction, and the divergence is instructive for anyone valuing financials.

Start with net interest margin (NIM)—the spread between what a lender earns on assets and pays on funding, expressed as a percentage of interest-earning assets. PL Capital estimates Bajaj Finance's flexi-loan portfolio at around ₹70,000 crore, or roughly 13 per cent of AUM. Even assuming these loans earn a 100-basis-point yield premium over conventional term loans, the brokerage calculates only a 13-basis-point impact on the company's overall NIM (Business Standard). The intuition: a premium that applies to only an eighth of the book, and could be partly recovered through redesigned products, dilutes heavily at the portfolio level.

Jefferies reaches a similar conclusion from the earnings side, estimating flexi loans at around 14 per cent of the portfolio and generating close to 50 basis points of incremental yield. It expects only a 1 to 1.5 per cent hit to earnings per share—implying that Friday's decline was larger than the likely earnings impact (Business Standard). Fee income is a second, smaller channel: Bajaj Finance reported fee income of ₹2,653 crore in the quarter ended June 2026, and Tata Capital about ₹1,090 crore; some of that is tied to repeated drawdowns and would erode if lines cannot revolve.

The mitigations are well understood by practitioners. Lenders can introduce prepayment charges on replacement term products to defend fee income; they can shift customers to structures where each drawdown triggers a fresh underwriting and disbursement; and diversified NBFCs can steer borrowers towards substitutes such as gold loans while preserving flexibility (ANI). The binding constraints are operational and behavioural—customer convenience and acquisition velocity—rather than a permanent hole in the spread.

Critical analysis#

The regulatory intent is sound. Curbing evergreening, forcing earlier recognition of borrower stress and strengthening borrower protection are all defensible objectives, and a Citigroup analyst described the intent as well-founded (Business Standard). Amortisation is a genuine risk-management improvement for lenders that lack cash-flow visibility.

Yet three tensions deserve deliberation during the consultation window. First, demand for revolving credit is real: borrowers with lumpy or uncertain cash flows—gig workers, small merchants, seasonal MSMEs—value the ability to redraw, and a blunt prohibition may push them towards costlier or less regulated alternatives. Second, transparency cuts both ways; a well-disclosed flexi product may be less opaque than the regulator fears, and the same Citigroup note argued the transparency of these structures merits discussion. Third, scope is genuinely uncertain. Macquarie's Suresh Ganapathy flagged that it is unclear whether products such as supply-chain financing fall within the final rules, and that investors will watch whether Bajaj Finance revises its FY27 loan-growth guidance of 22 to 24 per cent if it must shrink the flexi book (Business Standard). A poorly bounded definition could sweep in working-capital and corporate facilities that were never the target.

There is also a behavioural-finance lesson in the price action. A roughly ₹55,000 crore drawdown against a modelled 1 to 1.5 per cent EPS impact suggests the market priced regulatory uncertainty and headline risk, not discounted cash flows. For quantitative investors, that is the kind of dislocation event studies are built around—an information shock where the initial move may overshoot the fundamental adjustment. This is analysis, not advice: the direction of any correction depends on the final rules, which are not yet written.

Historical context#

This fits a multi-year RBI pattern of tightening NBFC oversight rather than a sudden rupture. The 2019 IL&FS and DHFL failures exposed asset-liability mismatches in the sector; the 2021 scale-based regulation framework introduced bank-like norms for the largest NBFCs; and in November 2023 the RBI raised risk weights on unsecured consumer credit to cool exuberant growth. The current draft continues that arc—narrowing product design after having already tightened capital and disclosure.

Set against those milestones, this is best read as a structural product-design intervention rather than a cyclical or systemic one. It does not question NBFC solvency or funding, as the 2019 crisis did; it reshapes how one profitable product category may be built. The RBI has also been busy elsewhere in the same week, proposing a new derivative-risk capital framework effective April 2027 and conducting large variable-rate reverse repo operations to manage surplus liquidity (Business Standard). The through-line is a regulator methodically de-risking the plumbing of Indian finance.

Key takeaways#

  1. The RBI's 6 August 2026 draft would bar most NBFCs from revolving credit and confine them to amortising term loans; credit-card issuers and bullet-repayment loans are exempt, with comments open until 28 August.
  2. Exposure is concentrated: flexi products are roughly 15 per cent of Bajaj Finance's consolidated AUM but below 1 per cent at Cholamandalam and negligible at several peers.
  3. The modelled earnings impact is small—about a 13-basis-point NIM effect and a 1 to 1.5 per cent EPS hit for Bajaj Finance—far below the ~₹55,000 crore of group value erased on the day.
  4. The core policy aim is to curb evergreening and force earlier recognition of borrower stress, given NBFCs' limited cash-flow visibility.
  5. Definitional scope—especially whether supply-chain and working-capital finance are captured—is the key open question and the main swing factor for the final rules.

Frequently asked questions#

What exactly is the RBI proposing? That most NBFCs offer only term loans with a fixed amortisation schedule and stop providing revolving credit, where a sanctioned limit can be repaid and redrawn.

Which lenders are most affected? Bajaj Finance, given its large flexi-loan franchise, followed at a distance by Tata Capital and L&T Finance; Cholamandalam, Poonawalla Fincorp and card-issuing NBFCs are largely insulated.

Why did the shares fall so much if the earnings hit is small? The decline reflected regulatory uncertainty and headline risk rather than the modest modelled impact; brokerages such as Jefferies argue the sell-off overshot the likely 1 to 1.5 per cent EPS effect.

What is evergreening, and why does the RBI care? It is servicing an old loan with fresh borrowing rather than genuine cash flows, masking distress. Amortising term loans make such stress harder to hide.

Is this final? No. It is a draft open for public comment until 28 August 2026; the final directions could be narrowed, phased or amended.

Will borrowers lose access to flexible credit? Not necessarily. Lenders can redesign products so each drawdown is a fresh loan, add substitutes like gold loans, or route customers through card-based lines, though convenience may reduce.

Does this threaten financial stability? No evidence of that. It is a targeted product-design measure against a stable macro backdrop of a 5.25 per cent repo rate and record forex reserves.

References#

Disclaimer: This article is for information and analysis only. It does not constitute investment, legal or financial advice, or a recommendation to buy or sell any security. Figures attributed to brokerages are their estimates, not certainties, and the RBI draft remains subject to change during consultation. Readers should conduct their own due diligence or consult a registered adviser before making decisions.

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