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BAF, Tata Capital and Aditya Birla Capital have relatively higher vulnerability

* The RBI has issued draft directions proposing that NBFCs discontinue revolving credit facilities, including flexi loans and overdraft-based credit lines. Going forward, NBFCs would be permitted to offer only term loans with a predetermined repayment schedule and a non-replenishing sanctioned limit. The restriction will not apply to entities specifically authorized to issue credit cards (e.g., SBI Cards).

* While the proposal remains at the draft stage and is open for stakeholder comments, the implementation in its current form would require several NBFCs to redesign a meaningful portion of their retail and MSME lending products.

* The impact is likely to be largely incremental rather than retrospective. We believe there is a high probability that the RBI will grandfather existing revolving credit facilities, thereby limiting disruption to outstanding loan books.

* Loan growth could moderate for lenders with significant reliance on flexi/OD products, which have been widely used as customer acquisition and retention tools. These products offer borrowers the flexibility to draw down and repay based on cash-flow requirements, making them particularly attractive for selfemployed borrowers, professionals and MSMEs.

* Minor impact on profitability: Flexi products typically generate 25-75bp higher yields than conventional term loans and earn annual maintenance charges (AMC) of ~25-30bp on the sanctioned limits. Migration toward standard term loans could, therefore, result in modest NIM compression and lower fee income.

* Several mitigating factors could cushion the impact. NBFCs may redesign products within the regulatory framework, introduce prepayment charges (generally absent in flexi loans), retain loans on their balance sheets for longer and underwrite fresh term loans for subsequent customer funding requirements. Over the medium term, compliant product innovations are likely to limit structural demand disruption.

* The MSME segment warrants close monitoring. Borrowers seeking workingcapital flexibility may increasingly migrate to banks, which continue to offer overdraft and cash-credit facilities, potentially weakening NBFCs' competitive positioning in this flexi (or overdraft) loan segment.

* Overall, the draft directions represent a meaningful regulatory tightening aimed at standardizing lending products and restricting embedded revolving credit features outside the credit card ecosystem. However, significant uncertainty remains regarding the final framework, particularly around grandfathering of existing facilities, transition timelines and the ability of NBFCs to migrate customers without materially affecting business volumes.

* In our coverage universe, diversified lenders have relatively higher exposure to flexi/revolving credit products (Exhibit 1). We believe Bajaj Finance (BAF), Tata Capital and Aditya Birla Capital (ABCAP) have the highest exposure to flexi loans and are, therefore, likely to be affected more if the draft guidelines are implemented in its current form. That said, the eventual impact will depend on the final regulatory framework, including the treatment of existing portfolios, transition timelines and the implementation mechanism prescribed by the RBI

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