A Line of Credit (LOC) is a financial concept and a flexible borrowing arrangement offered by a lender, such as a bank or Non-Banking Financial Company (NBFC), to a borrower. It is a pre-approved credit limit that the borrower can access as needed over a defined period, differing from a traditional term loan where the entire amount is disbursed at once. The modern concept of credit lines evolved in India from the post-independence era of 1947, with the formal structure of banking gaining ground during the British Rule. The need for flexible financing to support working capital and day-to-day operations, especially for businesses, drove the adoption of this mechanism.
The mechanism of an LOC is defined by its revolving nature, where the borrower can draw, repay, and redraw funds within the sanctioned limit. Crucially, interest is charged only on the amount actually utilised, not on the entire pre-approved limit. LOCs can be revolving, where the limit is restored upon repayment, or non-revolving, where the account closes after the amount is used and repaid. They can also be secured (with collateral) or unsecured (without collateral).
In the Indian economy, the LOC concept connects to two major areas: domestic lending and international diplomacy. Domestically, it is a core product for banks and NBFCs for working capital finance. Internationally, the Government of India extends concessional Lines of Credit to foreign governments through the Export-Import Bank of India (EXIM Bank), a strategic tool under the Indian Development and Economic Assistance Scheme (IDEAS) launched in 2003-04. These government-backed LOCs promote Indian exports by mandating that a substantial portion, typically 75% or more, of goods and services be sourced from India.
The concept has seen recent regulatory changes by the Reserve Bank of India (RBI). In February 2026, the RBI issued the Commercial Banks—Credit Facilities Amendment Directions, 2026, which introduced a new Chapter XIII A to tighten lending to Capital Market Intermediaries (CMIs) like brokers. This amendment mandates that banks must provide all credit facilities to brokers on a fully secured basis, requiring 100% collateral coverage to reduce systemic risk. Furthermore, the RBI has also moved to ensure that credit facilities delivered through the Unified Payments Interface (UPI) are governed by the nature of the underlying credit, closing a regulatory arbitrage that allowed for inconsistent classification of UPI-linked credit lines.