Credit is essential to a growing economy. It helps businesses manage cash flow, finance expansion and gives households access to large purchases.
But when does easy credit stop supporting growth and start supporting debt itself?
That is the question behind the Reserve Bank of India’s (RBI) recent proposal to restrict most NBFCs from offering revolving credit facilities, while retaining an exception for NBFCs authorised to issue credit cards.
Why Is the RBI Concerned?
Unlike a term loan, revolving credit allows borrowers to draw, repay and borrow again within an approved limit.
The flexibility is useful, particularly for businesses with uneven cash flows. But it can also allow borrowers to keep relying on fresh credit rather than genuinely reducing their debt.
The concern is simple:
New borrowing → repayment of old obligations → more borrowing.
The RBI is therefore focused on the risk that revolving facilities could allow financial stress to remain hidden for longer.
The Other Side
NBFCs argue that revolving credit is important for MSMEs that need flexible working capital. A business may need funds temporarily, repay them when payments arrive and need financing again later.
So the challenge is finding the balance:
Too much restriction → less flexibility for genuine businesses.
Too much flexibility → greater risk of prolonged debt.
What Could Be the Solution?
A middle path may be better than a blanket restriction.
Revolving facilities could remain available for genuine working-capital needs, while lenders face stronger safeguards around repayment capacity, repeated borrowing and the use of fresh credit to cover overdue debt.
The principle is simple:
Keep useful credit flexible, but make it harder to use new debt to hide old debt.
What Happens Next?
The RBI’s proposal is still a draft, so the final framework could change after consultation.
For NBFCs, tighter rules could mean redesigning lending products. For MSMEs, the bigger concern will be whether alternative financing can provide similar flexibility without significantly increasing costs.
The outcome could therefore influence not just NBFC lending, but how India’s small businesses finance their day-to-day operations.
The Bigger Lesson
India needs productive credit, not simply more credit.
for Example, A ₹ 5 lakh loan used to expand a business can create future income. The same amount repeatedly borrowed to meet existing obligations may only postpone the problem.
The real policy question is therefore:
How do we keep credit accessible enough to fuel growth without making debt so easy that borrowing becomes the problem?
Credit should finance tomorrow’s growth—not repeatedly pay for yesterday’s debt.
Disclaimer: This article is for informational and educational purposes only. It does not constitute financial, investment, or legal advice. The views expressed are for general understanding and should not be taken as a recommendation to buy, sell, or hold any financial product. Readers should conduct their own research and consult a qualified financial professional before making financial decisions.