Reserve Bank of India Proposes New Loan Interest Rate Rules

The Reserve Bank of India issued draft rules to overhaul and harmonize how banks and non-banking finance companies determine and revise interest rates. The proposal aims to align policies across commercial banks, Small Finance Banks, Local Area Banks, All India Financial Institutions, Regional Rural Banks, and Cooperative Banks to ensure fair borrower treatment and effective monetary policy transmission.

Under the proposed framework, all floating-rate personal loans and loans for MSMEs offered by commercial banks must be linked to an external benchmark. Loan agreements must explicitly specify benchmarks, reset frequencies, and reset dates, with resets occurring no more than once every three months. The central bank also proposes stricter controls on the spread charged over benchmarks, requiring a comprehensive credit profile review before revising credit-risk premiums and generally prohibiting changes to other spread components for three years.

The new principles-based framework will cover both fixed and floating rate loans, addressing regulatory gaps and divergent internal benchmark practices such as the Marginal Cost of Funds Based Lending Rate. If finalized, the rules will take effect on April 1, 2027. Existing loans must migrate to the new framework by April 1, 2029, provided the borrower consents and no migration charges are applied.