The Reserve Bank of India has issued proposed harmonised framework for interest rate determination on both fixed-rate and floating-rate loans across banks, NBFCs, and other regulated lenders. According to reports from The Economic Times, Mint, and Business Standard, the new framework requires lenders to maintain the spread between the benchmark rate and the loan rate for at least three years. This standardisation aims to eliminate the current practice where lenders offer better deals to new borrowers while charging higher rates to existing customers. Under the proposed framework, banks and other regulated lenders will have to maintain a comprehensive, board-approved policy covering the pricing of loans and advances. The policy will have to specify the methodology for determining interest rates, internal benchmarks, components of spreads, loan categories and the delegation of powers for loan pricing, and will also have to be reviewed at least once a year. As per Mint and Business Standard, the framework proposes a structure based on a benchmark plus a risk-based spread, with lenders not permitted to price loans below the applicable benchmark. The framework aims to harmonise rules across regulated entities while maintaining proportionality, address operational issues in the existing marginal cost of funds-based lending rate (MCLR) and external benchmark-linked lending rate frameworks, and standardise divergent practices around interest charging.
The proposed framework introduces standardised interest calculation methods across all lenders. As reported by The Economic Times, Mint, and Business Standard, interest on advances will have to be charged on monthly rests, except for specified agricultural advances, and calculated on a daily reducing balance basis using the actual/actual day-count convention. For floating-rate loans, the benchmark reset frequency for major lenders cannot exceed three months and must remain fixed for the tenor of the loan. Smaller lenders will have exemptions from some requirements. For fixed-rate loans, lenders will have to determine the interest rate with reference to an internal or external benchmark, along with a risk-based spread, and lenders will not be allowed to price loans below the applicable benchmark. Under the latest framework, lenders can offer loans at either fixed or floating rates, with the interest rate linked to an internal or external benchmark along with a risk-based spread, and lenders are not allowed to price loans below the applicable benchmark. As per the draft directions, for floating-rate loans, the benchmark, reset frequency and reset date would have to be clearly specified in the loan agreement, with the benchmark reset at a frequency chosen by the lender, but not more than once every three months. Once fixed for a loan, the reset frequency would remain unchanged through the loan's tenor, subject to specified exemptions for smaller cooperative banks, certain NBFCs and some urban cooperative banks. For agricultural loans, the reset period would be linked to the crop season, but could not exceed 12 months.
One of the key changes for individual borrowers is that all floating-rate personal loans offered by commercial banks would have to be linked to an external benchmark. According to the draft rules, "All floating rate personal loans and floating rate loans extended to MSMEs by commercial banks shall be linked to an External Benchmark." This requirement could make the relationship between changes in benchmark rates and loan rates easier to track for borrowers. The draft also proposes that the benchmark, reset frequency and reset date must be "explicitly specified in the loan agreement." Further, the benchmark on a floating-rate loan would have to be reset at a frequency chosen by the lender, but not more than once every three months. Once selected, the reset frequency would remain unchanged for the loan's entire tenure, subject to specified exemptions. For commercial banks and other lenders with total deposits exceeding ₹1,000 crore, the internal benchmark will be based on the marginal cost of funds, calculated as a moving average of the marginal costs of domestic deposits and borrowings over the preceding three months, and such lenders will also have to publish their internal benchmark on the first calendar day of every month.
The RBI has introduced comprehensive protection measures for small borrowers and agricultural lending. According to Business Standard, the draft directs all regulated entities to ensure that interest rates charged on loans of up to ₹50,000 are not usurious. Additionally, the RBI proposes that lenders explicitly set a ceiling on the annual percentage rate (APR), including interest and all other charges and fees, for microfinance and small-value loans. For short-term agricultural loans given to small and marginal farmers, the RBI has proposed that the combined interest, charges and fees should not exceed the principal amount. A short-term loan has been defined as one with an original tenor of up to one year. The RBI said its lending-rate framework is intended to support effective monetary policy transmission, appropriate pricing of credit risk and fair and non-discriminatory treatment of borrowers.
Under the proposed framework, NBFCs, all-India financial institutions, regional rural banks and cooperative banks would have the discretion to decide whether to offer external benchmark-linked floating-rate loans. As per Business Standard, these entities "may, at their discretion, choose to offer external benchmark linked floating rate loans to any category of borrowers." The central bank noted that existing lending-rate regulations are largely detailed for commercial banks, while rules applicable to other regulated entities, including NBFCs, mainly cover conduct-related aspects. The RBI has observed "divergent practices" among commercial banks in areas including the determination of the marginal cost of funds-based lending rate (MCLR) and its components. The framework, once finalised, will apply to banks, non-banking financial companies, cooperative banks, mortgage lenders and all-India financial institutions. Existing loans linked to benchmarks will have to migrate to the proposed framework by April 1, 2029. The RBI has invited comments on the draft proposals by September 11, 2026, and the new rules are proposed to take effect from April 1, 2027. The RBI said the proposed directions would provide a "broad, principles-based framework" for determining interest rates across regulated entities and replace the existing directions applicable to different categories of lenders.
