RBI proposal to curb NBFCs' revolving credit may choke MSME funding, says industry body FISME

Reserve Bank's proposal to bar NBFCs from providing revolving credit will disrupt legitimate working-capital finance used by small and medium enterprises, industry body FISME said on Tuesday, as it urged the central bank to reconsider the plan.

The Federation of Indian Micro and Small and Medium Enterprises (FISME) has flagged concerns on the 'Draft Reserve Bank of India (Non-Banking Financial Companies - Credit Facilities) Amendment Directions, 2026' issued earlier this month, saying a blanket ban on revolving credit by NBFCs may choke MSMEs' working capital.

In the draft, the Reserve Bank of India (RBI) has proposed that "NBFC shall only offer credit products which are in nature of term loans and shall not offer any revolving credit products".


The central bank has sought stakeholders' feedback on the draft till August 28, 2026.

FISME said that NBFCs play a critical role in serving enterprises, geographies, sectors and ticket sizes that are often not adequately served by banks. It cautioned that the proposed measure, though intended to curb opaque lending and evergreening, could unintentionally disrupt legitimate working-capital finance used by MSMEs.

FISME Secretary General Anil Bhardwaj said the RBI's concern regarding indefinite rollovers, hidden borrower stress and harmful app-based lending is understandable.

"However, working capital for a productive enterprise is economically different from consumer revolving credit. Regulation should target the risk and conduct of a product, not eliminate a legitimate financing instrument merely because it is revolving," he said.

The industry body has urged the RBI to retain the objective of transparent, responsible and non-evergreened credit, but reconsider an across-the-board ban on revolving facilities by NBFCs.

The final directions should distinguish consumer convenience credit from productive working-capital finance, regulate risks through underwriting, monitoring, disclosure and data-governance requirements, and preserve NBFCs' critical role in financing market segments not adequately served by banks, it said.

Experts said that revolving credit is a key funding channel for MSMEs.

Ranen Banerjee, Partner and Leader, Economic Advisory, PwC India, said that one of the key features of a revolving credit facility is restoration of the credit limit once the amount disbursed within the credit limit was repaid.

He said the revolving credit facility is important for MSMEs as they incur interest cost only on the utilised limit. MSMEs can repay any time and also do not need to apply for fresh loans as is the case in term loans.

The RBI has proposed to restrict NBFCs from extending revolving credit facility, and "it may have some minor impact on MSMEs as the share of NBFCs in total credit outstanding is only around 10-11 per cent", Banejee said.

Shrikant Goyal, Managing Director, Getfive Funds, said a typical micro and small enterprise often operates with thinner liquidity buffers and the biggest challenge that these enterprises confront is timely payment.

"An MSME manufacturer may sell products today but may receive payments after several weeks. As they need to pay salaries, raw material suppliers, and meet other expenses, flexi or revolving credit is extremely helpful in such a scenario. As such, banning revolving credit may impact the liquidity and cash flow of MSME companies in the short run," he said.

However, in the long run, it may prove to be beneficial, as the move may prompt MSMEs to manage their cash flow and expenses in an orderly and structured manner, Goyal added.

The MSME sector collectively contributes 31 per cent of GDP, accounts for approximately 35 per cent of manufacturing output, and represents close to half of India's merchandise exports.