RBI’s New Loan Pricing Rules: Transparency for Banks & NBFCs

The Reserve Bank of India (RBI) has unveiled a draft framework designed to standardise and enhance transparency in how banks and other regulated entities determine loan interest rates. This significant proposal seeks to improve monetary policy transmission, ensure fair risk-based credit pricing, and provide borrowers with clearer insights into their loan costs.

Aims for Greater Transparency

A core element of the RBI’s proposal mandates that all regulated entities establish a comprehensive, board-approved policy for loan pricing. This policy must detail interest rate calculation methods, applicable benchmarks, spread components, loan categories, and the delegation of pricing authority, undergoing an annual review.

Public feedback on these proposed regulations is open until September 11, 2026, with the framework slated for implementation from April 1, 2027.

Standardising Loan Interest Calculations

The RBI suggests a clear structure for both fixed and floating-rate loans, comprising a benchmark plus a risk-based spread, explicitly prohibiting pricing below the chosen benchmark. This ensures a foundational floor for interest rates across the lending landscape.

For floating-rate loans, agreements must explicitly disclose the benchmark used, its reset frequency, and the specific reset date. The reset frequency is capped at not exceeding three months, with interest calculations based on a daily reducing balance.

The spread over the benchmark can include elements such as credit risk premium, operating costs, term premium, and a business strategy premium. While the credit risk premium can be adjusted based on changes in a borrower’s credit profile, other spread components are generally not to be revised for at least three years, subject to specific exceptions.

New Benchmarking for Commercial Banks

Banks holding total deposits exceeding ₹1,000 crore will be required to adopt an internal benchmark, derived from a three-month moving average of the marginal cost of domestic deposits and borrowings. This benchmark must be published monthly, aiming to address existing inconsistencies in how banks determine the marginal cost of funds-based lending rate (MCLR).

A significant change for borrowers will be increased transparency in floating-rate loans from commercial banks. All floating-rate personal, retail, and MSME loans will need to be linked to an external benchmark, a move expected to enhance the transmission of the RBI’s policy rate changes.

Existing loans must transition to this new framework by April 1, 2029. Non-Banking Financial Companies (NBFCs), all-India financial institutions, regional rural banks, and cooperative banks will retain the discretion to adopt external benchmark-linked floating-rate loans.

Protecting Vulnerable Borrowers

The RBI has also proposed crucial safeguards for small-value and microfinance loans, introducing an explicit ceiling on the Annual Percentage Rate (APR). This measure aims to prevent the charging of usurious rates, defining a personal loan up to ₹50,000 as a small-value loan under these new proposals.

Furthermore, for short-term agricultural loans extended to small and marginal farmers, the total interest, charges, and fees will not be permitted to exceed the principal amount. This ensures protection for a critical segment of the economy.