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India needs guardrails around shadow loans

By Sohail Khan 18 August 2026, 9:38 am

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Business News›Industry›Banking/Finance›Banking›View: India needs guardrails around shadow loans, not bans

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View: India needs guardrails around shadow loans, not bans

Synopsis

The RBI’s proposed curbs on flexi loans could reshape how India’s self-employed workers and small businesses borrow. While the move aims to prevent evergreening of bad debt, it could also restrict a useful source of flexible working capital. The bigger question is whether tighter oversight can curb misuse without shutting out genuine borrowers.

illegal betting apps and loan apps ban — Representative image.

Some of India’s smaller nonbank financiers have been getting a bit too creative lately. And that has led the Reserve Bank of India to consider restricting the access to financing needed by self-employed professionals and small business owners.

Revolving credit — which allows people to borrow money up to a set limit, pay it back and borrow again — is a goalpost zealously guarded by banks. Allowing nonbanks unfettered access could encourage borrowers to pay interest to one lender by dipping into their so-called flexi loan with another. Rinsed and repeated, this might lead to the evergreening of bad debt.

That happens at banks too, but there’s just about 100 of them to supervise. Even though they are also regulated, policing more than 9,000 nonbank financiers is nearly impossible. Hence, the Reserve Bank of India wants loans allowing flexibility around repayments reserved for deposit-taking institutions and credit-card issuers. Other lenders will be banned.

Borrowers who use about 70% of their withdrawable limit cut interest costs by 200 to 250 basis points while keeping a buffer for rainy days. Lenders enjoy a 30 to 50 basis point advantage over a simple term loan. It works for both sides.

Also Read: RBI moves to distance self from bank deposit ratings

Is there evergreening of bad debt in India? Sure. As I wrote recently, smartphone-based loan apps have gone overboard with small-value ($200 or less) loans used to make ends meet. These carry usurious rates with no stacking limits. It is here that regulation is needed. Flexi loans, which have been offered by large nonbanks for a decade or longer, serve a genuine need without posing much of a systemic risk.

Market leaders like Bajaj Finance Ltd. and Aditya Birla Capital Ltd. have erected guardrails. As they and other lenders explained to the RBI in 2024, a properly structured flexi loan is not an open-ended credit facility.

When a bank gives a business an overdraft, it runs an annual health check on their sales and inventory. By the time stress is detected, a full default has usually occurred. With flexi loans, the sanctioned limit remains capped, follows a rigid amortization schedule, and reduces to zero in five to seven years. To avoid delinquency, borrowers must pay monthly installments using outside funds — not unused balances.

Throwing the baby out with the bathwater is a failure of imagination. Instead, the regulator should make fuller use of its regulatory sandbox — a controlled environment designed to assess risks and weigh opportunities. All flexi loans could be battle-tested in real time, allowing the RBI to gather granular data based on actual borrower behavior.

Banning the product won’t make it go away. One flexi contract will splinter into 20 term loans, adding to paperwork and overwhelming credit bureaus. Lenders scoring borrowers based on number of loans will have to rewrite algorithms. Borrowers will pay more in processing fees. None of this will yield any systemic improvement.

The larger point here goes beyond credit. Basic financial activities like saving, borrowing, and insuring against unforeseen events must not remain the preserve of the salaried middle class. India can no longer afford to ignore its small business owners, gig workers, and freelancers. As artificial intelligence puts pressure on salaried jobs, their numbers will only grow. Digitization has made the self-employed more visible and creditworthy, and they need access to the formal financial system without exposing it to unseen risks.

That calls for more competition, not less. Unless banks guarding their goalposts are challenged by imaginative nonbank rivals, why would they innovate to defend their turf? That is how the RBI should see its role in the flexi-loan debate.

(Disclaimer: Recommendations, suggestions, views and opinions given by the author are their own. These do not represent the views of The )

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