The Reserve Bank of India (RBI) has proposed a new framework under which banks and non-banking financial companies (NBFCs) would be required to reset the benchmarks for floating-rate loans at least once every three months.
The proposed framework aims to facilitate faster transmission of changes in policy rates to borrowers. If finalised, the proposed Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026 are scheduled to come into effect from April 1, 2027.
The draft also proposes a one-time migration of existing loans to the new framework by April 1, 2029, with borrower consent and no increase in the interest rate applicable immediately before migration or a migration charge.
This implies that the current external benchmark framework for retail home loans from banks will continue, along with the current three-month reset and credit-risk review requirements, and that floating-rate benchmarks (including MCLR-linked loans) must be updated every three months rather than longer periods like six months or a year.
What does the new rule mean for borrowers?
The proposed changes are mainly around how the spread over the benchmark is structured and revised.
Banks would need a board-approved policy setting out components such as the credit risk premium, operating cost, term premium and business strategy premium, with non-credit-risk components generally not being changed before three years.
Currently, Repo-Linked Lending Rate (RLLR) loans have interest rate reset periods of three months, whereas older Marginal Cost of Funds-based Lending Rate (MCLR) loans have reset periods ranging from six months to a year, which may vary from bank to bank.
“For borrowers, the key change would be clearer rules on how the spread is structured, when its components can change and how existing loans transition to the new framework,” said Adhil Shetty, CEO, BankBazaar.
“A shorter reset cycle can mean faster transmission of both rate cuts and rate increases. The impact will depend on the loan, benchmark and other pricing terms. A shorter reset interval can mean that both rate cuts and rate increases are reflected sooner in floating loan rates,” Shetty further added.
“For example, on a Rs 50 lakh loan over 20 years, a 25 basis point reduction from 8.5% to 8.25% would reduce the EMI from about Rs 43,391 to Rs 42,603, a difference of roughly Rs 788 a month. The actual impact will depend on when and how the lender passes through the benchmark change. Borrowers should understand their benchmark and reset terms when assessing the effect on their loan,” Shetty explained.
How will loan interest rates be determined?
Under the proposed framework, lenders may offer loans at either fixed or floating interest rates. For both types of loans, the interest rate would be determined using an applicable internal or external benchmark, along with a risk-based spread. Lenders would not be permitted to price a loan below the applicable benchmark.
For floating-rate loans, the benchmark, the frequency of reset and the reset date would have to be clearly specified in the loan agreement. The benchmark reset frequency would generally not be allowed to exceed three months, although certain regulated entities would be exempt from this requirement.
Interest calculation on loans
The draft directions propose that interest should generally be charged at monthly rests and calculated on a daily reducing balance basis, using the Actual/Actual day-count convention. There are separate provisions for agricultural loans, depending on the crop cycle and repayment schedule.
For small-value loans and microfinance loans, lenders would also have to specify a ceiling on the annual percentage rate (APR), including interest and other charges and fees, while ensuring that the rates are not usurious. A small-value loan is defined in the draft as a personal loan to an individual where the principal amount does not exceed Rs 50,000.
RBI proposes harmonised loan rate framework
The RBI has also highlighted divergent practices among commercial banks in areas such as the determination of the Marginal Cost of Funds-based Lending Rate (MCLR) and its components.
The existing guidelines also contain limited regulatory provisions relating to fixed-rate loans. To address these differences, the central bank has proposed a broad, principles-based framework covering both fixed-rate and floating-rate loans, while taking into account the nature, complexity and scale of individual regulated entities.
The draft directions are intended to support effective monetary policy transmission, appropriate pricing of credit risk and fair and non-discriminatory treatment of borrowers. The RBI said that the draft is being issued for public consultation and that, after examining the feedback received, final directions will be issued separately for different categories of regulated entities.
Stakeholders and members of the public can submit their comments on the draft directions by September 11, 2026, through the RBI’s ‘Connect 2 Regulate’ platform or by email.
What should borrowers do in case of merger or acquisition of their lender?
The draft also contains safeguards for borrowers when a regulated entity is acquired, merged or amalgamated. Where loans are transferred but the lender on record does not change, the existing contractual interest-rate terms, including the benchmark, spread and reset mechanism, would continue.
If the lender on record changes and a new agreement is entered into, the transferee lender’s interest-rate framework would apply. However, in the case of an acquisition, merger or amalgamation, the revised rate cannot exceed the rate applicable immediately before the transaction.
Disclaimer: This article is for informational purposes only and should not be construed as investment, financial, tax, or legal advice. Any illustrations, examples, or return projections used in this article are for explanatory purposes only and do not guarantee actual investment outcomes. The views and opinions expressed by experts quoted in this article are their own and should not be considered investment recommendations. Readers should consult a qualified professional before making any financial decisions.
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