The Reserve Bank of India's proposed loan pricing framework aims to bring greater transparency to how banks and non-banking financial companies determine and revise interest rates on loans. According to reports from Zee Business, the proposal is currently a draft and the RBI has invited comments from stakeholders. If finalised, the framework is proposed to come into effect from April 1, 2027, while the new framework for existing borrowers is proposed to apply from around April 2029. Experts Rajeev Das, CEO of I-Loan Credit, and Madhusudan Ekambaram, CEO and Co-Founder of KreditBee, described the proposal as a move towards greater transparency and more clearly defined loan pricing.
One of the key changes highlighted is the proposed three-month timeframe for passing on changes in benchmark or borrowing cost for floating-rate loans. As reported by Zee Business, floating rates can be linked to factors such as MCLR or the lender's average borrowing cost, along with the borrower's credit profile and other costs. Under the proposed framework, if the relevant benchmark changes, the benefit or impact would have to be passed on to customers within three months. Das illustrated this using a ₹50 lakh home loan at around 8% for 20 years, explaining that if the relevant rate changes, the borrower could see a change in EMI, with the exact impact depending on the movement in rates and loan terms. In one example discussed by the experts, a change could reduce the EMI by around ₹750, while the initial benefit to the customer could be around ₹9,000.
The draft focuses on risk-based pricing, under which lenders determine the additional premium charged to borrowers based on their risk profile. According to reports from Zee Business, Madhusudan explained that a lender's final interest rate can include the cost of funds, default risk, operating costs and profit margin. Under the proposed approach, changes in pricing would be more closely linked to the borrower's credit profile and the relevant benchmark or borrowing cost. For NBFCs, the proposal emphasizes that they would have to use defined external parameters to arrive at their interest rates and make the formula used for determining those rates public. The disclosed methodology would also allow the RBI to examine how customers were charged during supervision or audits.
The proposal addresses the overall cost of borrowing through the concept of Annual Percentage Rate (APR). As reported by Zee Business, Madhusudan explained that the interest rate does not necessarily represent the full cost of a loan because processing fees and other charges can materially increase the amount paid by the borrower. He gave an example of a ₹100 loan, where the borrower pays ₹2 as interest but ₹10 as a processing fee, making the overall cost ₹12. The draft does not specify a single numerical maximum APR for all loans, instead requiring lenders to define their maximum APR, have it approved by their board and maintain a rationale explaining the charges. For small loans, the proposal also discusses an overall limit on charges, under which interest and charges cannot accumulate beyond the loan amount.
The proposed rules would not necessarily impact all borrowers at the same time. According to reports from Zee Business, the new framework is proposed to apply from April 1, 2027, while existing borrowers could come under the framework from approximately April 2029, subject to the final rules. This distinction is particularly relevant for people who already have a home loan or personal loan. Das advised borrowers comparing lenders to focus on the benchmark, spread and reset period rather than simply choosing the institution with the lowest advertised interest rate. The experts noted that the impact could be greater on long-term floating-rate loans such as home loans, while many personal loans are shorter-term and offered at fixed rates, meaning the proposed floating-rate framework may have a more limited direct impact on them.
