The Reserve Bank of India has proposed a common framework governing how banks & other lenders determine & revise interest rates. Aimed at better monetary-policy transmission & borrower protection, the rules cover benchmarks, spreads, reset periods & interest calculation. Here is what the proposed regime entails
What has the RBI proposed and why?
The Reserve Bank of India (RBI) has released draft Interest Rates on Loans and Advances Directions, 2026, to harmonise loan-pricing rules across regulated lenders. Currently, commercial banks operate under detailed norms governing internal and external benchmarks, while rules for non-banking financial companies (NBFCs), cooperative banks and other institutions focus largely on conduct. Practices also vary in calculating the Marginal Cost of Funds-based Lending Rate (MCLR), revising spreads and charging interest.
The banking regulator wants a transparent, principles-based regime that allows borrowers to understand how the rate of interest on their loans is determined and under what circumstances it can change. The framework is also intended to improve the transmission of mone tary policy, ensure appropriate pricing of
credit risk and promote fair treatment of borrowers.
The draft rules are proposed to take effect from April 1, 2027.
Which lenders and loans will be covered?
The proposed directions will cover commercial banks, including small finance banks and local area banks; regional rural banks; urban and rural cooperative banks; all-India financial institutions such as Export Import Bank of India, National Bank for Agriculture and Rural Development, National Bank for Financing Infrastructure and Development, National Housing Bank and Small Industries Development Bank of India; and NBFCs, including housing finance companies.
They will apply to fixed- and floating-rate loans, although requirements will vary according to the type and size of the lender. Commercial banks must continue linking floating-rate personal loans and floating-rate loans to micro, small and medium enterprises to an external benchmark. Such linkage will remain optional for regional rural banks, cooperative banks, NBFCs and all-India financial institutions.
How will lenders determine the interest rate?
A loan’s interest rate will comprise a benchmark plus a spread reflecting the borrower’s risk and other permissible costs. Lenders may use internal or external benchmarks, based on the institution and loan category, but cannot price a loan below the applicable benchmark.
Banks using the MCLR will calculate the marginal funding cost from a three-month moving average of the weighted interest cost of fresh domestic deposits and borrowings. The calculation must be system-generated and independently verifiable. Eligible lenders will publish their internal benchmark on the first calendar day of every month for loans sanctioned during that month.
What changes are proposed for floating-rate loans?
The loan agreement must disclose the benchmark, reset frequency and reset date. The benchmark has to be reset at least once every three months, ensuring that changes in the underlying rate are transmitted without excessive lags. Once chosen, the reset frequency cannot ordinarily be changed during the loan’s tenure.
Agricultural loans will follow crop cycles, with a maximum reset period of 12 months. Some smaller cooperative banks and NBFCs will receive exemptions reflecting their operational capacity. The new rules do not automatically mean lower EMIs; the borrower’s rate will continue to move with the benchmark, subject to the agreed reset cycle.
Can lenders change the spread when they want?
No. The draf directions seek to prevent arbitrary changes in the markup charged over the benchmark. The credit-risk premium may be revised only when the borrower’s credit profile changes. Other components of the spread on a floating-rate loan cannot generally be revised for three years from the date of sanction or the last revision.
When a change is permitted, the lender must apply a board-approved policy and communicate the reason to the borrower. This should make loan pricing more predictable and prevent lenders from altering spreads merely to offset a fall in the benchmark, thereby weakening the benefit of policy-rate reductions.
What happens to existing borrowers?
Exisisting floating-rate loans be migrated to the revised framework by April 1, 2029. Migration will require the borrower’s consent and cannot result in an increase in the interest rate or the imposition of additional charges. Interest on most advances will ordinarily be levied at monthly rests.
Agricultural advances will receive differentiated treatment: Interest on long-duration crops may be charged annually, while short-duration crop loans will follow repayment dates linked to crop cycles; compounding will begin only after repayment becomes overdue. The RBI has invited comments until September 11, 2026, and will issue final directions after considering the feedback.