Will your loan rate change? RBI proposes new rules on benchmarks and pricing

The Reserve Bank of India (RBI) has proposed a common framework for how banks and other regulated lenders price loans, with a focus on greater transparency, benchmark-linked rates and safeguards against excessive charges.

The draft framework, which is open for public comments until September 11, 2026, is proposed to come into effect from April 1, 2027. It is aimed at making loan pricing more consistent while ensuring that changes in policy rates are passed on to borrowers more effectively.

Banks may have to link floating loans to external benchmarks

Under the proposed rules, commercial banks would have to link floating-rate retail loans and floating-rate loans to micro, small and medium enterprises (MSMEs) to an external benchmark.

The requirement would not apply in the same way to all regulated lenders. NBFCs, all-India financial institutions, regional rural banks and cooperative banks would have the option of deciding whether to offer floating-rate loans linked to an external benchmark.

The RBI has also proposed that existing loans be moved to the new framework through a one-time mapping exercise by April 1, 2029.

New framework for setting loan rates

Lenders would be required to have a board-approved policy explaining how loan interest rates are fixed. The policy would cover benchmarks, risk-based spreads, loan categories and the authority given to officials to set pricing.

For fixed- and floating-rate loans, pricing would broadly follow a benchmark plus a risk-based spread. Lenders would not be allowed to price loans below the applicable benchmark.

For floating-rate loans, borrowers would have to be told the benchmark, reset frequency and reset date in the loan agreement. The benchmark would generally be reset at intervals of no more than three months.

The RBI has also proposed that interest be calculated on a daily reducing balance using the actual/actual day-count convention.

APR ceiling proposed for small loans

The draft includes a specific safeguard for small-value and microfinance loans. Lenders would have to set an explicit ceiling on the annual percentage rate (APR), which includes interest as well as other charges and fees, and ensure the rate is not usurious.

An individual personal loan of up to ₹50,000 would fall under the proposed small-value loan category.

For short-term agricultural loans given to small and marginal farmers, the total interest, charges and fees would not be allowed to exceed the principal amount.

The RBI has invited comments on the proposals until September 11, with the new directions proposed to take effect from April 1, 2027.