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RBI Loan Rules: The Reserve Bank of India has proposed a new draft framework to make the process of determining loan interest rates more transparent and uniform. This may affect customers taking loans from banks and NBFCs. In the new proposal, emphasis has been laid on clarifying the rules to reset of loan interest rate, benchmark, spread and floating rate.

How will the loan interest rate be decided?

The proposed system calls for linking the loan price to a benchmark rate and a fixed spread. The bank or NBFC will have to adopt a clear board approved policy for determining the spread. With this, customers will be able to understand on what basis the interest rate given to them has been decided.

Important changes for floating rate customers

It is proposed to continue the system of linking to external benchmarks in some floating rate loans. At the same time, there has also been talk of setting a clear limit regarding the interval at which the interest rate will be changed. According to the proposal, the reset period can be kept for a maximum of three months.

Proposal to change the calculation of MCLR also

RBI has suggested to make the calculation of MCLR uniform. The proposed model calls for a three-month moving average of the marginal cost of new deposits and borrowings. Its objective is to make the process of setting interest rates in different institutions more systematic.

The method of calculating interest will be more clear

In the new proposal, emphasis has also been laid on standardizing the method of calculation of interest. It is proposed to calculate interest on the basis of Daily Reducing Balance and adopt day-count convention on the basis of actual days. Apart from this, it has also been said to bring a uniform system regarding the use of monthly rest.

Proposal for APR limit on small loans (RBI Loan Rules)

The proposal to cap the APR i.e. annual percentage rate for microfinance and some small value retail loans is also important. This may limit the scope for charging excessive costs on small loans. However, this is likely to put pressure on the margins of some lenders that rely on small-ticket, high-interest loans.

What will change for customers?

If this proposal is implemented as a final rule, it may become easier for loan customers to understand the interest rate structure. Especially in floating rate loans, having clear information about the benchmark and spread will enable customers to understand the cost of their loan better. However, the actual EMI change will depend on each customer’s loan, interest rate, outstanding amount and reset timing.