The Overdraft Is the Loan Your Business Needs, and an RBI Draft Puts It at Risk

⏱ 8 min read|Published 7 October 2026|By Dibyendu Choudhury

A fabricator I will call Raman, because the example is built from the pattern I have seen many times and not from one person, needs ₹6 lakh every month for steel, and gets paid ₹14 lakh by a large buyer sixty days later. For most of every cycle he is short. Then the buyer's cheque arrives, he repays what he drew, and the shortage starts again. What Raman needs is not a loan of ₹10 lakh. He needs a limit of ₹10 lakh that he uses when he is short and repays the day money comes in.

That product has an old name, the overdraft or cash credit, and a newer family of cousins sold by non-bank lenders under names such as flexi loans and credit lines. A draft from the Reserve Bank of India, dated 6 August 2026, proposes to take most of those cousins away. As the Monetary Policy Committee prepares to announce its decision tomorrow, 7 October, it is worth understanding why this draft matters more to Raman than the rate decision does.

What the draft actually says

Business Standard reported on 6 August that the RBI had proposed amending its credit facilities directions for non-banking financial companies so that an NBFC may offer only term loans and no revolving credit products at all. Only NBFCs authorised to issue credit cards, which the report says are currently two, would be exempt. A term loan is defined as a fixed principal amount, disbursed in one or more instalments, with a pre-determined amortisation schedule that can be periodic instalments or a bullet payment. Comments were due by 28 August, and the changes would take effect immediately on notification.

Commentary on the draft carried by TaxGuru lists the products that could be caught: flexi loans, overdraft-type facilities, cash-credit lines, supply chain finance, factoring and some fintech-partnered digital loans. I would read that list as one commentator's reading of the text and not as the RBI's own enumeration. What matters is the principle behind it. A product that lets you draw, repay and draw again against a sanctioned limit is, in this draft's terms, a revolving product, and an NBFC would not be allowed to offer it.

As of Business Standard's report of 4 October, the proposal was still a draft. I have not seen a final version.

Why the people who lend to small firms object

The same 4 October article, by Raghu Mohan, records the objection. Shachindra Nath of UGRO Capital and the Finance Industry Development Council argued that a blanket restriction would discourage early repayment by MSMEs whose cash flows are uneven. The logic is simple. If the only product on offer is a term loan, a borrower who has cash this month cannot repay and re-borrow. He keeps paying interest on money he does not need, or he repays and then has nowhere to go when the next gap opens.

Raman's case shows the cost. Suppose, for illustration, a lender charges 14 per cent a year, a rate I have chosen only to make the arithmetic easy. A ₹10 lakh revolving limit of which Raman uses an average of ₹4 lakh over the year costs about ₹56,000 in interest. A ₹10 lakh term loan taken as a bullet for the same year costs about ₹1.4 lakh, because he pays on the full amount whether the steel cheque has arrived or not. The ₹84,000 difference is not a fee. It is the price of a product that does not match how his business earns money.

That is why I regard this as a working-capital story and not a technical banking footnote. A term loan is the right tool for a machine, a vehicle or a shed. It is the wrong tool for the gap between paying a supplier and being paid by a buyer.

The week the rate and the product collide

The Monetary Policy Committee meets from 5 to 7 October. According to Business Standard's preview of 2 October, the repo rate stands at 5.25 per cent after four unchanged reviews, retail inflation reached 4.82 per cent in August, and in the paper's poll eight of ten respondents expected a quarter-point increase to 5.50 per cent. A hike would be the first since February 2023. I cannot tell you what the Committee will decide, and by the time you read this it may have decided.

What I can say is that a rate increase hurts different borrowers differently. An MSME on a floating-rate overdraft sees the cost move on the balance actually used. An MSME locked into a term loan for working capital has already borrowed the full sum, so a hike on a floating term loan lands on the whole amount. The more the system pushes small firms toward fixed-principal borrowing for working-capital needs, the more exposed they are to every rate cycle. The draft and the rate decision are two separate things, but they arrive together on the same desk.

Banks are not off the hook

The draft applies to NBFCs. Banks continue to run overdrafts and cash credit, and some of the other regulation of 2026 has been generous to small borrowers. The Reserve Bank's amendment to its MSME lending directions, issued on 10 February 2026 and summarised by the law firm Mehta & Mehta, raised the collateral-free lending limit for micro and small enterprises from ₹10 lakh to ₹20 lakh, with up to ₹25 lakh at the bank's discretion for units with a good track record. In January, the new co-lending norms cut the minimum retention a lender must hold from 20 per cent to 10 per cent, according to Business Standard.

These are useful. Yet a bank limit is only as good as the data you give the bank. Business Standard's article reports the Finance Minister's May appeal to lenders to go beyond the template and think in terms of specific business verticals, and a Bank of Baroda executive's view that predictable receivables make an MSME's cash flow and repayment capacity easier to assess. I take two lessons from that. First, lenders are being pushed to underwrite cash flow, not collateral. Second, the borrower who can show a predictable cash flow will be offered better terms than the one who cannot.

Receivables are your best collateral

This is where the delayed-payment problem returns. Business Standard, citing the Economic Survey 2025-26, reports that about ₹8.1 trillion is locked in delayed payments to MSMEs. It also reports that TReDS, the platform on which large buyers' invoices are auctioned to financiers, had facilitated more than ₹8.7 trillion in cumulative transactions by FY26, and that central public sector enterprises are now required to settle invoices through it.

If your buyer is a government company or a large corporate registered on the platform, an invoice you raise is not just a claim. It is something you can sell at a discount to a financier the day it is accepted, without touching your overdraft limit. For Raman, a ₹14 lakh invoice that would be paid in sixty days can be turned into cash in days, at a cost set by the auction. His working-capital gap then shrinks, and so does the limit he needs.

What I would do this month

1. Arrange the limit before you need it. Apply for a cash-credit or overdraft limit from your bank in a month when your account is healthy. Banks lend to firms that do not look desperate.
2. Measure your gap. Take the days you wait to be paid, add the days of stock you hold, subtract the days of credit your suppliers give you. Multiply by your daily cost of sales. That is the working capital you need, and it should drive the size of the limit.
3. Match the product to the purpose. Term loans for assets, revolving limits for the gap. If a lender offers you a flexi or revolving line from a non-bank, ask what happens to it if the draft becomes final, and whether the lender can convert it to a bank-linked or term structure without a penalty.
4. Put your invoices in order. Clean e-invoices, GST returns filed on time, and buyer acknowledgements make you both easier to lend to and easier to discount on TReDS.
5. Do not cling to a floating term loan if you have a choice. Ask for the fixed-rate quote alongside the floating one, and compare them over the period you will actually carry the debt.

A policy conversation that deserves your voice

I do not know the Reserve Bank's full reasoning, and I do not assume it wants to hurt MSMEs. Business Standard notes that the draft builds on the Credit Facilities Directions issued in November 2025, which drew clearer lines between types of loan. Clarity is a fair aim. But a rule written to sort lenders' product categories can still land on a fabricator in Hyderabad, a spice packer in Guntur or a garment unit in Tiruppur, who will never read the circular and will feel the effect in a bank statement.

If you borrow from an NBFC on a flexi or line-of-credit product, tell your industry association, your lender and your local MSME development office how the product works for you. A regulator can only weigh a trade-off it has heard about. And whatever the Committee announces tomorrow, spend the afternoon on your own numbers: your gap in days, your limit, and the invoices you could discount. Those three figures decide your next quarter far more than any single circular.

Published 7 October 2026 · dibyenduchoudhury.com