The Reserve Bank of India (RBI) has released a new draft plan that could change how Non-Banking Financial Companies (NBFCs) lend money. In the 'Draft RBI (NBFC – Credit Facilities) Amendment Directions, 2026', the central bank proposed that NBFCs should only provide term loans. This means NBFCs would be stopped from offering revolving credit products (loans where the limit resets as the borrower pays back money). The RBI has asked for public feedback on this plan until August 28, 2026.

The Federation of Indian Micro and Small and Medium Enterprises (FISME) has raised a red flag over this proposal. They believe a total ban on revolving credit will choke the funding needed by small businesses. NBFCs often help small companies that cannot get easy loans from traditional banks. FISME argues that while the RBI wants to stop 'evergreening' (giving new loans to hide old bad ones) and risky app-based lending, this blanket ban might hurt honest businesses that need flexible money for daily operations.

Working capital is the money a business uses for its daily tasks, like buying raw materials or paying staff. For a small manufacturer, payments from customers often take weeks to arrive. During this gap, a revolving credit facility allows them to borrow only what they need and pay interest only on that amount. If this is replaced by term loans (loans for a fixed period with a fixed repayment schedule), MSMEs would have to apply for fresh loans every time they need money, which is slow and expensive.

Industry experts like Ranen Banerjee from PwC India noted that NBFCs account for about 10-11 percent of total credit outstanding. While the impact might seem small in percentage, it is huge for specific sectors. Shrikant Goyal from Getfive Funds pointed out that small firms have very thin liquidity buffers (extra cash). Without flexible credit, these firms might struggle to pay salaries or suppliers on time. However, some believe that in the long run, this might force small businesses to manage their cash flows more strictly.

For bank officers, this is a critical development to watch. If NBFCs are restricted, MSME customers might turn to banks for their working capital needs. However, the MSME sector is massive, contributing 31 percent to India’s GDP and half of the country’s exports. Banks will need to be ready to handle this potential shift in demand. The RBI's main goal is to ensure transparent and responsible lending, but the industry is hoping for a middle ground that protects small business growth.

Looking ahead, the banking community should watch for the final RBI guidelines after the August 28 deadline. The final rules might distinguish between consumer loans and productive business loans. If the ban stays, banks may need to design new products to help MSMEs fill the gap left by NBFCs. For now, the focus remains on finding a balance between preventing hidden bad loans and supporting the heartbeat of the Indian economy.