RBI floats harmonised interest rate rules for banks, NBFCs; proposes 3-year curbs on loan spread changes

The Reserve Bank on Wednesday proposed a common framework for determining interest rates on loans across banks, NBFCs and other regulated entities, including restrictions on how lenders can change components of the spread charged to borrowers.

The draft Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026 proposes a "broad, principles-based framework" for determining interest rates on both fixed-rate and floating-rate loans, with the aim of harmonising rules across regulated entities.

The directions are proposed to come into effect from April 1, 2027.

At present, the regulatory framework on interest rates on advances is applicable to commercial banks, while regulatory instructions for NBFCs, All India Financial Institutions, Regional Rural Banks, Urban Cooperative Banks and Rural Cooperative Banks are largely with regard to conduct-related aspects, the RBI said.

The central bank also noted divergent practices among commercial banks in certain areas, including determination of MCLR and its components, while existing guidelines contain very limited regulatory instructions regarding fixed-rate loans.

Spread changes

For borrowers, one of the more significant proposals relates to the spread charged over the benchmark.

Under the draft, a regulated entity will determine the interest rate on both fixed and floating-rate loans with reference to an internal or external benchmark, plus a risk-based spread.

The spread is the additional margin charged by a lender over the benchmark to account for costs and risk premiums associated with the loan.

The RBI has proposed that a lender "shall not price a loan below the applicable benchmark for that loan".

The spread will comprise a credit risk premium and one or more other components. The RBI's illustrative list includes operating cost, term premium and business strategy premium.

The credit risk premium can be revised only when the borrower's credit profile undergoes a change, in accordance with the lender's policy and the terms of the loan agreement. Such a revision must also be preceded by a comprehensive review of the borrower's credit risk profile.

Other components of the spread, however, "shall not be revised before three years for a floating rate loan", the draft said.

A lender may reduce such components before the three-year period for customer retention, but this must be on justifiable grounds and in a non-discriminatory manner.

External benchmark for bank personal loans

Commercial banks may offer external benchmark-linked loans to other categories of borrowers at their discretion.

The requirement would not be mandatory for RRBs, UCBs, RCBs, NBFCs and AIFIs, which may choose to offer such loans at their discretion.

For floating-rate loans, the benchmark, reset periodicity and date of reset will have to be explicitly specified in the loan agreement.

The benchmark will generally be reset at a periodicity chosen by the lender, not exceeding three months. Once fixed for a loan, this periodicity will remain unchanged for the entire tenor of the loan.

Existing borrowers

The proposed framework also provides for the migration of existing benchmark-linked loans.

The RBI has proposed that all existing loans and advances linked to an internal or external benchmark be migrated to the new framework by April 1, 2029, through a one-time mapping exercise.

The mapping will require the borrower's consent and must not put the borrower in a disadvantageous position in terms of the interest rate applicable to the loan.

The revised interest rate shall not exceed the rate applicable immediately before the transition, according to the draft. Lenders will also not be allowed to levy any charges for the migration.

If a benchmark is discontinued during the currency of a floating-rate loan, the lender will have to change the benchmark without putting the borrower in a disadvantageous position.

APR ceiling for small loans

The draft also proposes an explicit ceiling on the Annual Percentage Rate (APR) for microfinance loans and small-value loans.

The APR, inclusive of the interest rate and all other charges, must be capped while ensuring that such rates are not usurious, the RBI said.

A small-value loan for this purpose means a personal loan to an individual where the principal amount does not exceed ₹50,000.

The RBI has also proposed that interest on advances be charged at monthly rests and computed on a daily reducing balance basis, using the Actual/Actual day-count convention.

For short-term agricultural loans and advances to small and marginal farmers, total interest and other charges and fees shall not exceed the principal amount.

The central bank said final directions will be issued separately for each category of regulated entity after examination of the feedback received.