The Reserve Bank of India is proposing tighter rules on non-bank lenders’ flexible credit products, sparking concerns about the impact on small businesses and gig workers who rely on adaptable finance solutions in an evolving labour market.
India’s central bank is weighing a rule that would sharply narrow how non-bank lenders can structure credit, in a move that has drawn a warning from one commentator that a blanket restriction could hurt self-employed borrowers and small firms that rely on flexible finance. The Reserve Bank of India has sought public feedback by August 28 on a proposal that would confine shadow banks to term loans with fixed repayment schedules, while overdraft-style lending would be left to banks.
The debate matters because India’s labour market still leaves millions outside regular pay packets. According to the lead report, fewer than half of urban workers and only 13% of rural workers receive monthly salaries, while more than 200 million people are self-employed. For that group, banks often remain reluctant to extend working-capital limits, especially where collateral is limited or income is irregular. Smaller businesses face a further squeeze when buyers delay payments, which has helped non-bank lenders build a business around structured flexi loans that allow withdrawals up to an approved cap and repayments when cash is available.
Supporters of the product say it is not the same as an open-ended overdraft. The lead article says larger non-bank lenders, including Bajaj Finance and Aditya Birla Capital, have argued that properly designed flexi loans are capped, follow a fixed amortisation schedule and run down to zero over five to seven years. On that reading, the facility gives borrowers room to manage uneven cash flow without giving them a revolving line that can be repeatedly rolled over.
Even so, regulators are concerned about the misuse of flexible credit. The lead report says the Reserve Bank fears that looser structures could encourage borrowers to service one lender with money borrowed from another, a pattern that can hide deteriorating loans. Separate measures announced by the RBI this year suggest a broader tightening of prudential rules: Reuters has reported that the central bank told banks and other lenders not to levy pre-payment charges on floating-rate loans to individuals and micro and small enterprises from loans sanctioned or renewed from January 1, 2026, while also moving to ensure UPI-linked credit lines are treated in the same way as other loans for regulatory purposes.
That context suggests the central bank is trying to close loopholes without blocking access to credit altogether. Industry observers have argued that outright bans can push lending into more fragmented forms, raising paperwork, processing fees and pressure on credit bureaus without necessarily reducing risk. The better answer, according to the lead article, may be to use the RBI’s regulatory sandbox more aggressively so that flexi-loan products can be tested with real borrower data before any permanent rule is imposed. For India’s growing ranks of freelancers, gig workers and small entrepreneurs, the stakes are broader than one product: they go to whether formal finance can adapt to an economy where salaried work is no longer the default.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
