The Reserve Bank of India has proposed a unified, enforceable framework from 1 April 2027 covering regulated entities including commercial banks, cooperative banks and NBFCs. According to reports from Mint, this move aims to make loan pricing more transparent and interest rates easier to compare. Existing floating-rate loans would have to be brought under the new framework by April 1, 2029, giving lenders time to adjust their pricing structures. The framework aims to address the issue of lack of transparency, unexplained rate changes and delayed transmission, with external benchmarks such as the repo rate, Government of India Treasury Bill yields, Secured Overnight Rupee Rate (SORR), or another Financial Benchmarks India Pvt. Ltd. (FBIL) benchmark being used by banks for floating-rate retail loans and MSME loans.
Banks are raising significant concerns over the proposed three-year lock-in on business strategy premium, which could reduce their flexibility in setting loan rates. As reported by ZeeBiz, lenders may find it difficult to change pricing in response to competition and changing market conditions. The proposed framework could also affect pricing in loan segments where banks are looking to grow their business, as lenders may have less room to adjust rates based on demand and competition. Banks are seeking more pricing flexibility and expect to seek greater flexibility in their representations on the draft framework. The central bank has proposed stricter rules governing the different premiums added to loan rates, with experts noting that floating rate fluctuations will be limited to two or three parameters.
Industry body FISME has warned that the RBI's proposal to ban NBFCs from offering revolving credit facilities threatens legitimate working-capital finance for small and medium enterprises. As reported by PTI, FISME cautioned that the proposed measure, though intended to curb opaque lending and evergreening, could unintentionally disrupt legitimate working-capital finance used by MSMEs. The MSME sector collectively contributes 31% of GDP, accounts for approximately 35% of manufacturing output, and represents close to half of India's merchandise exports. Ranen Banerjee from PwC India noted that revolving credit facilities are important for MSMEs as they incur interest costs only on the utilised limit and can repay anytime without needing fresh loans.
The proposed framework could bring greater transparency to how banks and NBFCs determine interest rates, with experts noting that borrowers will gain greater clarity on how their loan interest rate is determined, what can cause it to change and how quickly changes in the underlying benchmark can impact them. According to ZeeBiz, floating loan rates may reflect benchmark changes within three months, meaning borrowers could benefit more quickly if the relevant benchmark falls, though they would also face the impact of rising benchmarks more quickly. For example, a ₹50 lakh home loan at 8% for 20 years could see EMI changes with potential benefits of around ₹750 and initial benefits of around ₹9,000. The framework also addresses the Annual Percentage Rate (APR) concept, with lenders required to define their maximum APR, have it approved by their board and maintain a rationale explaining charges, while small loans face overall limits on charges.
The proposed standardization is likely to tighten pricing for high-risk borrowers and has raised concerns among lenders about margin compression. According to Mint, Mangesh Zope of Peaceful-Loans believes NBFCs currently use introductory rates to attract customers and later widen spreads, which could be affected by the three-year spread lock. However, experts suggest the impact may be limited as NBFCs' share in total credit outstanding is only around 10-11%. CEO and co-founder of Finbox, Rajat Deshpande noted that the new rules could make pricing easier to understand by breaking the spread into named components such as credit risk premium, operating cost, term premium, and business strategy premium. The experts emphasize that existing borrowers may come under the framework from approximately April 2029, making it particularly relevant for people with existing home or personal loans. For borrowers considering balance transfers or refinancing, the framework could enable better comparison of underlying pricing structures rather than just advertised rates.
