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The Reserve Bank of India (RBI) has proposed a uniform system for determining loan interest rates. The objective is to make lending practices among banks and other regulated lenders more transparent and consistent. The draft framework includes provisions for a board-approved pricing policy, benchmark-linked rates, and safeguards against charging excessive rates on low-value loans.

These proposals are part of the RBI's broader initiative to enhance the transmission of monetary policy, ensure that the cost of credit reflects risk, and provide borrowers with clarity regarding how their loan rates are determined. The draft regulations are open for public comment until September 11, 2026, and are proposed to come into effect on April 1, 2027.

Significantly, the proposal does not mandate that all NBFCs link floating-rate loans to an external benchmark. While the requirement to link to an external benchmark applies to floating-rate retail loans and loans to Micro, Small, and Medium Enterprises (MSMEs) extended by commercial banks, NBFCs and various other regulated entities will have the flexibility to decide whether or not to adopt an external benchmark.

RBI's New Proposal
Under the proposed framework, regulated entities must maintain a comprehensive, board-approved policy for pricing loans and advances. This policy will outline the methodology for determining interest rates, applicable benchmarks, components of the spread, loan categories, and the delegation of pricing authority. The policy must also be reviewed at least once a year.

For both fixed-rate and floating-rate loans, the RBI has proposed a structure based on benchmarks and risk-based spreads. Lenders will not be permitted to price loans below the applicable benchmark. For floating-rate loans, the loan agreement must specify the benchmark, reset frequency, and reset date. Generally, the benchmark cannot be reset at intervals longer than three months. The framework also proposes that interest be calculated on the daily reducing balance using the ‘Actual/Actual day-count convention.’

The spread over the benchmark may include components such as the credit risk premium, operating costs, term premium, and business strategy premium. If the borrower's credit profile changes following a comprehensive review, the credit risk premium may be adjusted. Other components of the spread generally cannot be altered before three years, except in specific cases.

For lenders with total deposits exceeding ₹1,000 crore, the proposed internal benchmark will be based on the ‘Marginal Cost of Funds,’ calculated using a three-month moving average of the marginal cost of domestic deposits and borrowings. Such lenders will also be required to publish the internal benchmark on the first calendar day of every month.

The RBI noted disparities in the methods banks use to determine the ‘Marginal Cost of Funds-based Lending Rate’ (MCLR), prompting the move towards a framework based on broader principles.

What will be the impact on borrowers?
For bank customers, one of the most significant changes could be greater transparency in floating-rate loans. The RBI proposes that all floating-rate personal or retail loans and floating-rate MSME loans extended by commercial banks be linked to an external benchmark.

Linking loans to an external benchmark allows the impact of changes in the RBI’s policy rate to be transmitted more effectively to borrowers, as the benchmark is not controlled by any single bank. According to the draft, existing loans must be transitioned to the proposed framework by April 1, 2029, through a one-time mapping process.

However, NBFCs, all-India financial institutions, regional rural banks, and cooperative banks will have the discretion to decide whether or not to offer floating-rate loans linked to an external benchmark. This implies that borrowers from NBFCs may not receive a benchmark-linking system similar to that available to bank customers.

The RBI has also proposed a specific safeguard for low-value and microfinance loans. Regulated entities will be required to set a clear cap on the Annual Percentage Rate (APR)—inclusive of interest and other charges—and ensure that the rate is not excessive. Under the proposal, personal loans of up to ₹50,000 will be classified as low-value loans.

For short-term agricultural loans extended to small and marginal farmers, the total interest and charges cannot exceed the principal amount. The RBI has invited suggestions on the draft until September 11, 2026. The proposed directives will apply to banks, NBFCs, cooperative banks, housing finance companies, and all-India financial institutions, subject to specific provisions and exemptions applicable to each category.

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