RBI Proposes Unified Interest-Rate Framework for Loans: What Banks, NBFCs and Borrowers Need to Track
The Reserve Bank of India (RBI) has released the draft Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026 for public comment. The draft proposes one principles-based framework for pricing both fixed-rate and floating-rate loans across commercial banks (including small finance banks and local area banks), regional rural banks (RRBs), urban co-operative banks (UCBs), rural co-operative banks (RCBs), All India Financial Institutions (AIFIs) and non-banking financial companies (NBFCs), including housing finance companies. The proposed effective date is 1 April 2027.
RBI announced the draft through Press Release No. 2026-2027/877 dated 12 August 2026, following its Statement on Developmental and Regulatory Policies of 5 August 2026. Comments were invited up to 11 September 2026 through the Connect 2 Regulate section of RBI's website or by email. The draft is a consultation document: RBI has said it will issue final Directions separately for each category of regulated entity after examining the feedback.
Why RBI wants a common framework
According to the press release, benchmark-based lending rules for floating-rate loans apply mainly to commercial banks today. NBFCs, AIFIs, RRBs and co-operative banks have only limited instructions, largely on conduct. RBI also found divergent practices in how lenders determine the marginal cost of funds based lending rate (MCLR) and noted that there is very little regulatory guidance on fixed-rate loans. The draft aims to harmonise the rules while scaling them to each entity's operational complexity.
Main proposals
| Area | What the draft proposes |
|---|---|
| Pricing basis | Both fixed and floating loans priced at an internal or external benchmark plus a risk-based spread; no loan priced below its applicable benchmark |
| Interest computation | Generally at monthly rests, on a daily reducing balance, using the Actual/Actual day-count convention |
| Small loans | Explicit ceiling on the annual percentage rate (APR) for microfinance loans and small-value personal loans of up to Rs 50,000, with pricing that is not usurious |
| Farm loans | For short-term agricultural loans to small and marginal farmers, total interest and charges cannot exceed the principal |
| Reset periodicity | Floating-rate resets generally at intervals of not more than three months, fixed for the tenor of the loan |
| External benchmark | All floating-rate personal loans and floating-rate MSME loans by commercial banks to be linked to an external benchmark; other lenders may choose |
| MCLR | Marginal cost of funds to be a three-month moving average of the cost of fresh deposits and fresh borrowings |
| Spread | Credit risk premium revisable only when the borrower's credit profile changes; other spread components not revised for three years on a floating-rate loan |
| Existing loans | Migration to the new framework by 1 April 2029, with borrower consent, no worse rate and no migration charge |
Fixed-rate loans move inside the framework
The biggest shift is for fixed-rate lending. RBI has noted that existing instructions say very little about fixed-rate pricing. Under the draft, a fixed rate would have to be traceable to an internal or external benchmark plus a risk-based spread, and it could not be set below that benchmark. Lenders offering fixed-rate products would need a documented methodology showing how each rate is built up.
Floating-rate loans: faster resets and stickier spreads
A maximum reset interval of three months means changes in the benchmark would reach borrowers faster than under longer reset cycles. The spread is split into the credit risk premium and other components such as operating cost, term premium and business-strategy premium. The credit risk premium can move only when the borrower's credit profile changes. The other components would generally stay unchanged for three years, which limits a lender's ability to re-price a loan after origination for reasons unconnected with the borrower's risk.
Example: a borrower with a floating-rate MSME loan from a commercial bank would have it linked to an external benchmark, with the rate reset at least every three months. If the borrower's credit profile does not change, the bank could not raise the operating-cost or business-strategy part of the spread for three years.
Existing borrowers
Loans already linked to an internal or external benchmark would move to the new framework by 1 April 2029 through a one-time mapping exercise. The borrower's consent is needed, the new rate cannot leave the borrower worse off than before the transition, and no charge can be levied for the migration.
What lenders and finance teams should do now
- Treat the draft as a proposal. Final category-wise Directions may differ, so borrowers and internal teams should not be told the draft rules are binding.
- Compare current fixed-rate and floating-rate pricing with the benchmark-plus-spread model and list products priced below any benchmark.
- Check whether loan systems can handle three-month resets, daily reducing balance computation and the MCLR moving-average method.
- Review loan agreements and pricing disclosures for the benchmark, reset and spread terms.
- Estimate the number of existing benchmark-linked loans that would need consent-based migration by 1 April 2029.
For auditors and internal control teams, the draft would make loan-pricing governance an audit area in its own right, with the data behind benchmarks and spread revisions needing clear records.
Updated on 27 September 2026: linked RBI's press release of 12 August 2026 and the draft Directions, added a summary table, and removed details that could not be confirmed.
