RBI Proposal to Bar NBFCs from Providing Revolving Credit Could Affect MSME Funding, Says FISME

The Federation of Indian Micro and Small and Medium Enterprises (FISME) has cautioned that the Reserve Bank of India's (RBI) recent proposal to bar non-banking financial companies (NBFCs) from providing revolving credit could disrupt legitimate working-capital finance used by small and medium enterprises.

The industry body flagged its concerns regarding the 'Draft Reserve Bank of India (Non-Banking Financial Companies – Credit Facilities) Amendment Directions, 2026', which was issued earlier this month. Under the proposed draft, the central bank stated that NBFCs shall only offer credit products in the nature of term loans and shall not offer any revolving credit products. The RBI has sought stakeholder feedback on the draft until August 28, 2026.

FISME noted that NBFCs play a critical role in serving enterprises, geographies, sectors, and ticket sizes that are often not adequately served by traditional banks. While acknowledging that the RBI's intention is to curb opaque lending, evergreening, indefinite rollovers, hidden borrower stress, and harmful app-based lending, the industry body argued that the measure could unintentionally harm productive enterprises.

FISME Secretary General Anil Bhardwaj stated that working capital for a productive enterprise is economically different from consumer revolving credit. He suggested that regulations should target the risk and conduct of a specific product rather than eliminate a legitimate financing instrument entirely. The industry body has urged the central bank to distinguish consumer convenience credit from productive working-capital finance, regulate risks through underwriting and monitoring, and preserve NBFCs' financing role for underserved market segments.

Industry experts have highlighted the significance of revolving credit for small businesses. Ranen Banerjee, Partner and Leader for Economic Advisory at PwC India, explained that a key feature of a revolving credit facility is the restoration of the credit limit once the disbursed amount is repaid. This allows MSMEs to incur interest costs only on the utilized limit and repay at any time without needing to apply for fresh loans as required with term loans. Banerjee added that the impact on MSMEs may be minor since the share of NBFCs in total credit outstanding is only around 10 to 11 percent.

Shrikant Goyal, Managing Director at Getfive Funds, pointed out that micro and small enterprises typically operate with thinner liquidity buffers and frequently face delayed payments from buyers. Flexi or revolving credit helps these businesses manage expenses such as salaries and raw material purchases while waiting for receivables. Goyal noted that banning revolving credit could impact liquidity and cash flow in the short run, though it may encourage more structured cash flow management in the long run.

The MSME sector plays a vital role in the Indian economy, collectively contributing 31 percent of the GDP, accounting for approximately 35 percent of manufacturing output, and representing close to half of India's merchandise exports.

"The debate around the RBI's proposed restrictions on revolving credit highlights the delicate balance between maintaining financial system stability and ensuring liquidity access for small businesses. While regulatory oversight is necessary to prevent evergreening and high-risk lending, policy frameworks must account for the unique operational realities of MSMEs, which heavily rely on flexible working capital to manage uneven cash flows." — Dr. Shishir Gupta, Founder & CEO, StartupLanes